SDNY Grapples with Fuld

Photo by Ian Hutchinson on Unsplash

In Fuld v. Palestine Liberation Organization, as we have previously covered, the Supreme Court held that the due process limits on personal jurisdiction under the Fifth Amendment differ from those of the Fourteenth Amendment. But the Court did not spell out what the personal jurisdiction analysis should be under the Fifth Amendment, other than stating that the Fifth Amendment analysis would necessarily be more flexible. In a forthcoming essay, I suggest how federal courts might navigate personal jurisdiction questions in the Fifth Amendment context post-Fuld. That question was also creatively addressed in a recent decision from the Southern District of New York, Orient Plus International Ltd. v. Baosheng Media Group Holdings Ltd. (Judge Jennifer L. Rochon). This post describes the court’s analysis, what it clearly got right, and where its proposed approach might be further refined.

The Securities Act and Foreign Directors

In Orient Plus, investors sued Baosheng, an online marketing firm traded on NASDAQ that is based in China and incorporated under the laws of the Cayman Island, for violating the Securities Act of 1933. They alleged that Baosheng failed to disclose an investigation by Chinese authorities that may have led to the loss of Baosheng’s largest client; Baosheng’s stock price subsequently fell by 96%.

In addition to Baosheng itself, the investors sued three individuals who had signed Baosheng’s SEC registration statement, another individual who purportedly had actual control over Baosheng, and three independent directors of Baosheng (all of whom are Chinese citizens), as well as three U.S. underwriters and two U.S. auditors who worked on Baosheng’s initial public offering. In September, the district court largely denied the defendants’ motion to dismiss the complaint for failure to state a claim. In doing so, it held the complaint stated a claim against the three independent directors under Section 11 of the Securities Act, 15 U.S.C. § 77k. That section creates a private cause of action for untrue facts or material omissions in registration statements and allows harmed investors to bring such a claim against:

(1) every person who signed the registration statement;

(2) every person who was a director of (or person performing similar functions) or partner in the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted; [and]

(3) every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions, or partner;

as well as accountants and underwriters who help prepare the registration statement. The independent directors clearly fell within the second category of liable individuals (and, for at least one of them, potentially in the third category as well).

The district court deferred ruling, however, on the three independent directors’ motion to dismiss for lack of personal jurisdiction in order to solicit additional briefing on the effect of Fuld. The Securities Act includes a worldwide service-of-process provision that states process “may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found.” Such statutory authorization satisfies Federal Rule of Civil Procedure 4(k)(1)(C), leaving only the question of whether the exercise of personal jurisdiction against the three directors would violate the Due Process Clause of the Fifth Amendment.

An Easy Starting Point

The district court easily concluded that it could exercise personal jurisdiction over one director who resides in the United States. Before Fuld, the federal circuits were unanimous that the limits on the federal government’s assertion of personal jurisdiction under the Fifth Amendment mirrored the limits on state governments’ assertion of personal jurisdiction under the Fourteenth Amendment, as adapted to account for nationwide contacts and the broader interests of the federal government. If that test (what I have taken to calling “the Fourteenth Amendment algorithm”) is satisfied in a given case, the court reasoned, personal jurisdiction would necessarily pass muster under Fuld’s more flexible approach to Fifth Amendment personal jurisdiction. Because U.S. residency would have been sufficient to satisfy the Fourteenth Amendment algorithm, it is therefore still sufficient for Fifth Amendment purposes post-Fuld.

As I point out in my forthcoming essay, satisfying the Fourteenth Amendment algorithm may no longer be a necessary condition for satisfying the Fifth Amendment’s Due Process Clause, but it is a sufficient one—and recognizing that sufficiency will resolve most cases involving personal jurisdiction under the Fifth Amendment.

Defining a “Meaningful Nexus”

The other two independent directors do not reside in the United States and argued their conduct outside the United States lacked a “meaningful nexus” to the United States. The district court agreed that the existence of a “meaningful nexus” is the correct inquiry. The challenge is that Fuld did not flesh out what such a nexus would require.

The district court thus looked to the analysis developed in the criminal law context for determining whether the application of U.S. law would violate a criminal defendant’s Fifth Amendment due process rights. “Under that test,” the court summarized, “‘[w]hether extraterritorial application [of U.S. criminal law] violates due process depends on whether there is a sufficient nexus between defendant and the United States such that application would be neither arbitrary nor fundamentally unfair.’”

I think there is a useful comparison to be drawn here as I will explain further below), but I would be careful not to describe this move (as the district court did) as “extending the sufficient-nexus test to the civil context.” The sufficient-nexus test that the district court invoked was developed to identify the limits on the reach of criminal statutes. That is, it addresses a question of prescriptive, not adjudicative, jurisdiction. (In criminal cases, personal jurisdiction is easily established because the defendant must be physically present in the U.S. courtroom.) In addition to the significant conceptual differences between the two questions, the policy analysis might also cash out differently: in the criminal context, the U.S. Government has made a careful determination that U.S. law should be invoked against conduct that occurred outside the United States, which might lead courts to be comfortable with greater flexibility than they would find appropriate in civil litigation between private parties.

That said, there are conceptual links between the scope of adjudicative and prescriptive power. Scholars have noted, for example, that the Supreme Court’s limits on personal jurisdiction as exercised by individual states may be a stand-in for limits on choice of law: instead of telling states when they can or can’t apply their own law to a dispute, the Court has told states who they can or can’t make show up in their courtrooms in the first place. Meanwhile, on the transnational plane, judges grappling with U.S. laws that reach too much extraterritorial conduct (despite or even because of the Supreme Court’s current extraterritoriality framework) have found solace in the limits imposed by personal jurisdiction to ensure that U.S. law does not purport to rule the world. Put more simply, limits on prescriptive and adjudicative jurisdiction serve some of the same purposes.

If understood as drawing insights from the sufficient-nexus test from the criminal context, rather than importing those limits wholesale to the personal jurisdiction analysis, the Orient Plus court’s analysis largely aligns with my proposed roadmap for applying Fuld. The core move is to loosen the rigid structure that has formed around the Fourteenth Amendment algorithm. First, in lieu of requiring “purposeful availment,” it is enough under the Fifth Amendment that the defendant knew (or should have known) that their conduct would affect the interests of the United States. The Orient Plus court reasoned that, as directors of a company that was registering to sell securities on a U.S. stock market, the individual defendants knew or should have known the effects any misrepresentations would have on legitimate U.S. regulatory interests.

Second, the district court reasoned that when Congress is explicit in its legislation, there is a heavy burden to show that application of that legislation will violate due process. The decision’s quotations and analysis on this point conflated the extraterritorial reach of federal law (prescriptive power) and the scope of personal jurisdiction (adjudicative power). Regardless, I agree that, after Fuld, the relative explicitness with which a statute authorizes personal jurisdiction matters. That consideration fits comfortably within a “reasonableness” check on the exercise of jurisdiction under the Fifth Amendment.

These two considerations combine to demonstrate that asserting personal jurisdiction over a director pursuant to the Securities Act—which authorizes worldwide service on anyone who was a director at the time of the filing of a misleading registration statement—does not offend the Fifth Amendment. The directors knew investors in the United States would be relying on Baosheng’s registration statute and that the U.S. has an active and long-standing regulatory interest in preventing securities fraud; furthermore, Congress has expressly extended liability to directors who fail in their duties in this regard, in addition to expressly authorizing service of process on offenders located outside the United States.

Conclusion

I agree with where the district court ended up, but I would shift slightly the framing of its analysis. Invoking the sufficient-nexus test from the criminal context too literally risks crossing analytical wires—it is like conflating the presumption against extraterritoriality with personal jurisdiction. The sufficient-nexus test might provide a useful analogy, but only to fill in the contours of a distinct analysis.

I’m not sure the analogy is even needed, however. Fuld’s meaningful-nexus approach shares the same core insight as International Shoe Co. v. Washington, before decades of precedential refinement turned International Shoe into the complex algorithm we associate with it today. (I was delighted that the court cited to my prior TLB post in which I initially flagged this connection between Fuld and International Shoe.) Even if the Supreme Court has rejected application of the more complex algorithm in the Fifth Amendment context, courts can still draw on shared underlying principles for guidance. As the Orient Plus court suggested, Fuld’s deference to express congressional preferences fits comfortably within a reasonableness analysis, and a focus on the defendant’s knowledge and intentional conduct is just a relaxed version of purposeful availment.

That’s not to suggest that courts should recreate the Fourteenth Amendment algorithm with new requirements. It is merely to point out that the analysis of a “meaningful nexus” under Fuld resembles the Fourteenth Amendment’s minimum contacts analysis because they both start from the same insight: that the exercise of jurisdiction must be reasonable in light of the defendant’s choices and the sovereign’s interests. Fuld means that courts can reach a little further under the Fifth Amendment than they could under the Fourteenth Amendment—at least when Congress has expressed its intentions clearly. Importing the sufficient-nexus test from the criminal law context is not necessary and may even risk ossifying the Fifth Amendment personal jurisdiction analysis too quickly into another rigid algorithm.