District Court Permits Clean Air Act Action Against Canadian Company
April 24, 2024
The presumption against extraterritoriality is the principal tool that U.S. courts use to determine the reach of federal statutes. Last year, in Abitron Austria GmbH v. Hetronic International, Inc. (2023), the U.S. Supreme modified the presumption by requiring conduct relevant to a provision’s focus to occur in the United States in order for the application of that provision to be considered domestic.
In United States v. Diesel Spec, Inc., Judge James R. Knepp II (Northern District of Ohio) applied the revised presumption in a civil enforcement action brought by the U.S. Department of Justice under the Clean Air Act (CAA) against a Canadian company that sold “defeat devices,” used to bypass vehicle emission controls, to buyers in the United States. The court held that sales to U.S. customers were sufficient U.S. conduct to make the action a domestic application. But at the same time, the court rejected the U.S. request for information from the defendant about its sales of the defeat devices, reasoning that the relevant conduct—recordkeeping—occurred in Canada. The decision illustrates some of the problems that Abitron’s reworking of the presumption is causing for the transnational enforcement of federal law.
The Facts
The defendant, Diesel Spec, Inc., is a Canadian company located in Quebec. The Department of Justice (DOJ) alleged that Diesel Spec sold defeat devices through distributors in Ohio, and directly to customers there, that allowed purchasers to bypass emission controls on motor vehicle engines.
The CAA and its implementing regulations make it illegal to “render inoperative” emission controls on motor vehicles and to “sell, or offer to sell, or install, any part or component … where a principal effect of the part or component is to bypass, defeat, or render inoperative” such emissions controls. The act further requires persons subject to the CAA’s emissions standards to keep records and make those records available to the U.S. Environmental Protection Agency (EPA) upon request. In 2018, EPA hand delivered such a request to Diesel Spec in Quebec, but the company refused to comply.
The Presumption Against Extraterritoriality
Federal statutes are subject to a presumption against extraterritoriality. The U.S. Supreme Court has established a two-step framework for applying the presumption. At step one, a court looks for a clear indication of a provision’s geographic scope and, if it finds one, applies the provision as Congress has indicated. If there is no clear indication, then at step two, a court determines the “focus” of the provision. If the conduct relevant to the provision’s focus occurs in the United States, then applying the provision is considered domestic and permissible. If the conduct relevant to the provision’s focus occurs abroad, then applying the provision is considered extraterritorial and impermissible.
The Supreme Court’s 2023 decision in Abitron involved the federal trademark statute. The defendants in that case placed U.S. trademarks on products manufactured and sold in Europe, some of which were ultimately intended for the United States. In a closely divided decision, the Supreme Court held that it was not enough for the focus of the statutory provision (e.g. preventing consumer confusion) to occur in the United States. There additionally had to be domestic conduct relevant to that focus—in that case, use of a trademark in U.S. commerce. As I have noted previously, Abitron seems to embrace a conduct-based version of the presumption similar to the one that the Court adopted in American Banana Co. v. United Fruit Co. (1909) and employed during the early twentieth century.
The Defeat Device Sales
Because DOJ did not argue that the CAA provisions at issue contain a clear indication of extraterritoriality, Judge Knepp turned immediately to the second step of the presumption analysis. The parties agreed that the focus of these provisions was to protect air quality and prevent pollution from motor vehicles in the United States. Diesel Spec argued that “the conduct relevant to this focus occurred in Canada because its marketing, sales, shipping, and vehicle service all took place from its Quebec location.” DOJ, on the other hand, argued that the relevant conduct occurred in the United States because the “defeat device products were shipped to distributors and individuals in the United States, even if those sales were ‘instigated’ from Canada.”
The district court noted that neither party cited “law indicating definitively whether sales of products from another country to the United States are considered to ‘occur’ in the United States or that other country.” The defendant relied primarily on the Supreme Court’s seminal decision in Morrison v. National Australia Bank (2010), holding that § 10(b) of the Securities Exchange Act applies only to transactions in the United States. But Judge Knepp was not convinced, noting that Morrison asked whether the “purchase or sale” (emphasis added) was made in the United States.
In fact, Morrison did not address the question before the district court—the location of the relevant conduct—at all. Morrison’s holding was limited to determining § 10(b)’s focus, which it found to be the transaction rather than the fraud. The Supreme Court did not even articulate a requirement of conduct relevant to a provision’s focus until RJR Nabisco, Inc. v. European Community (2016) six years later.
DOJ relied on United States v. Hussain (2020), a Ninth Circuit decision holding that the focus of the federal wire fraud statute is the use of U.S. wires rather than the scheme to defraud. Judge Knepp found Hussain persuasive. But like Morrison, Hussain was all about determining the focus of a statutory provision rather than determining the location of the relevant conduct.
The district court might have found more support in two Supreme Court decisions during the early twentieth century involving international transportation routes. Having held in American Banana that U.S. antitrust law applied only to conduct in the United States, the Court nevertheless applied the Sherman Act to the monopolization of transportation routes between the United States and other countries in United States v. Pacific & Arctic Railway (1913) and Thomsen v. Cayser (1917). “[T]o apply the [presumption against extraterritoriality] as defendants apply it,” the Court reasoned in Pacific & Arctic Railway, “would put the transportation route described in the indictment out of the control of either Canada or the United States. These consequences we cannot accept.” As noted above, the current version of the presumption seems like a throwback to American Banana, so decisions interpreting and applying its test might be useful.
In any event, Judge Knepp clearly reached the right result. “The CAA’s objective is to prevent pollution in the United States and to protect the country’s air quality,” he wrote. “The Complaint clearly alleges Defendant sold defeat devices directly to entities and individuals in the United States, where those devices violated CAA requirements while in the United States.” That is enough.
The Request for Information
Judge Knepp also applied the presumption against extraterritoriality to the CAA’s recordkeeping provision. Again, DOJ did not argue that this provision contained a clear indication of extraterritoriality, so the court began with step two. Again, the parties seemed to agree that the focus of the recordkeeping provision is to enforce the CAA and prevent air pollution in the United States.
DOJ argued that because Diesel Spec was selling defeat devices to the United States in violation of the CAA, it “stands to reason … that [the] EPA should be able to use the tools that Congress has given it to enforce the CAA.” But Judge Knepp disagreed. “The conduct relevant to this provision,” he reasoned, “was Defendant’s recordkeeping and refusal to provide records to the EPA. Even if the products were available in, purchased in, and shipped to the United States, the relevant conduct as to this claim is primarily … its record creation and storage at its sole location in Quebec.”
Here, I think, the district court went astray. While it is true that a court must determine the geographic scope of each statutory provision, it is equally true that this analysis must not occur “in a vacuum.” “If the statutory provision at issue works in tandem with other provisions,” the Supreme Court explained in WesternGeco LLC v. ION Geophysical Corp. (2018), “it must be assessed in concert with those other provisions.” Thus, in WesternGeco, the Court held that when patent infringement occurred in the United States, the Patent Act’s damages remedy allowed recovery of all damages flowing from the infringement, including those suffered abroad. A similar analysis should apply here. When a foreign company violates the CAA in the United States, the CAA’s remedial provisions should apply.
Conclusion
I sympathize with Judge Knepp, who clearly tried to apply the Supreme Court’s confusing extraterritoriality jurisprudence as best he could. The problem lies in the Court’s stubborn insistence on domestic conduct, even when the focus of a provision is something other than conduct. This domestic conduct requirement has the potential to frustrate Congress’s intent across a range of statutes. The decision in this case, reading the CAA’s enforcement provisions more narrowly than its substantive provisions, offers yet another example.
Congress could, of course, fix such problems by specifying the geographic scope of every statutory provision. But statutes like the CAA are extremely complex, and revising such statutes to indicate clearly the scope of each provision would be an enormous task. I hope that the Supreme Court will come to abandon its “myopic conduct-only test.” In the meantime, accepting the Court’s invitation to read related provisions in tandem may offer some relief.