All I Want for Christmas (from the Supreme Court)
December 18, 2024
Following up on John Coyle’s post yesterday, I’ve prepared my own list of things I wish courts in the United States would do differently in transnational litigation.
1. Abandon the U.S.-Conduct Requirement for the Presumption Against Extraterritoriality
The Supreme Court uses a presumption against extraterritoriality to determine the geographic scope of federal statutes. There have been several versions of the presumption, but the current version employs a “two-step framework.” The first step looks for a clear indication of whether a statutory provision applies extraterritorially. If a court finds one, it applies the provision as Congress has indicated.
The second step is more complicated. It asks a court to determine the “focus” of the provision, a test that originated in Morrison v. National Australia Bank (2010). Morrison was a securities fraud case in which the fraud occurred in the United States but the transaction occurred in Australia. The Supreme Court held that Securities Exchange Act § 10(b) did not apply because the “focus” of that provision was the transaction not the fraud.
When the Court restated the presumption in RJR Nabisco, Inc. v. European Community (2016), it added something to the “focus” step, stating that “the case involves a permissible domestic application” of a statutory provision if “the conduct relevant to the statute’s focus occurred in the United States” (emphasis added). But the Court did not apply this U.S.-conduct requirement in RJR, holding only that the focus of RICO’s civil cause of action itself had to occur in the United States.
In Abitron Austria GmbH v. Hetronic International, Inc. (2023), the Court had to decide whether just the focus of a provision or also conduct relevant to the focus must occur in the United States for its application to be considered domestic. By a 5-4 vote, the Court held that U.S. conduct is required. I think this was a mistake. The problem with a conduct requirement for the presumption is that it tends to frustrate Congress’s intent when Congress was focused on something other than conduct. It is well accepted, for example, that U.S. antitrust laws focus on preventing anticompetitive effects in the United States. Adding a U.S.-conduct requirement to such laws would exempt cases involving only foreign conduct that fall within the aim of these laws because of the U.S. effects.
My wish that the Supreme Court abandon Abitron and return to Morrison is not entirely unrealistic. The Court in Abitron was closely divided. Just a week before, in Yegiazaryan v. Smagin, the Court decided another extraterritoriality case that cut the opposite way. And the Court may soon find itself faced with criminal cases in which a U.S.-conduct requirement could stymie the prosecution of international terrorists and human traffickers.
2. Don’t Defer to the Executive’s Immunity Determinations, Defer to Its Interpretations of International Law
The Supreme Court has held that when the Foreign Sovereign Immunities Act (FSIA) is inapplicable, a defendant may still be entitled to sovereign immunity under federal common law. This is true for foreign official immunity and for immunity from criminal prosecution, neither of which the FSIA covers. In such cases, the executive branch claims that courts in the United States are bound by its determinations of immunity and by the rules of immunity that it articulates.
This claim raises serious separation of powers concerns. The executive branch does not make federal common law—federal courts do. And blindly obeying executive determinations of immunity, in Justice Gorsuch’s phrase, “relegate[es] courts to the status of potted plants.”
But the federal common law of sovereign immunity—both foreign official immunity and immunity from criminal prosecutions—rests on rules of customary international law. Courts in the United States should give great weight to the State Department’s interpretation of customary international law, just as they defer to the State Department’s interpretation of treaties. Doing so does not present separation of powers problems because the federal courts would still be making federal common law. Those courts would just be basing those rules on the State Department’s interpretations of international law.
The Supreme Court may get a chance to decide what deference to the executive should look like in this context if it takes up the Halkbank case for a second time. After the Court held that the FSIA does not cover criminal prosecutions, it remanded Halkbank to the Second Circuit. Although the Second Circuit deferred to the executive branch’s determination that Halkbank is not entitled to immunity, it expressly reserved the question whether an executive decision to deny immunity would be entitled to deference if it ran contrary federal common law. I expect that the defendant in Halbank, a Turkish state-owned bank, will ask the Court to review its case again.
3. Abolish the Act of State Doctrine
The act of state doctrine is a rule of federal common law providing that U.S. courts will not question the validity of an official act of a foreign government fully performed within its own territory. The doctrine began as an offshoot of foreign sovereign immunity and morphed into one that applies on the merits.
In Banco Nacional de Cuba v. Sabbatino (1964), the Supreme Court applied the doctrine to hold that U.S courts could not question the validity of Cuba’s expropriation of American-owned property in Cuba. Justice Harlan explained that it was “the strong sense of the Judicial Branch that … passing on the validity of foreign acts of state may hinder rather than further this country’s pursuit of goals both for itself and for the community of nations as a whole in the international sphere.” The Court seemed particularly concerned about the possibility of undercutting U.S. negotiations and “embarrass[ing]” the executive “in its dealings with other countries.”
The Supreme Court significantly narrowed the act of state doctrine in W.S. Kirkpatrick & Co. v. Environmental Tectonics Corp. (1990). “The act of state doctrine does not establish an exception for cases and controversies that may embarrass foreign governments,” Justice Scalia wrote for a unanimous Court, “but merely requires that, in the process of deciding, the acts of foreign sovereigns taken within their own jurisdictions shall be deemed valid.” The Restatement (Fourth) of Foreign Relations Law describes the act of state doctrine after Kirkpatrick as “a special choice-of-law rule” that overrides state public policy exceptions (see § 441 comment a).
Kirkpatrick’s narrowing of the act of state doctrine undermines the justification for treating it as a rule of federal common law. In the United States, choice of law is typically governed by state law, and federal courts sitting in diversity are obliged to follow the choice-of-law rules of the states in which they sit. This is not an outlier—state law governs many issues in transnational litigation. When the act of state doctrine was about avoiding embarrassment to U.S. foreign relations, a federal rule may have made sense. Now that the doctrine is simply about choice of law, it seems hard to justify.
A recent Supreme Court decision emphasizes the point. In Cassirer v. Thyssen-Bornemisza Collection Foundation (2022), the Court held that state choice-of-law rules should be applied in cases against foreign governments under the FSIA. Although the Court acknowledged that it could create federal common law to protect “uniquely federal interests” in areas like foreign relations, it saw “scant justification” for doing so there. If a federal choice-of-law rule is not necessary in cases brought against foreign governments, one wonders why one is necessary in cases that merely question the validity of their official acts.
Add to this the fact that lower federal courts keep misapplying the act of state doctrine, and the case for the Supreme Court to take another look at the doctrine seems strong.