The New (Old) Presumption Against Extraterritoriality

 

Justice Oliver Wendell Holmes, Jr.

Library of Congress

The reach of U.S. law keeps changing. For decades—in fact, off and on for more than a century—U.S. courts have turned to the presumption against extraterritoriality to determine the geographic scope of federal statutes. When the presumption changes, so does the reach of U.S. law. And the presumption has changed a lot lately.

Most recently, in Abitron Austria GmbH v. Hetronic International, Inc. (2023), the Supreme Court applied the presumption against extraterritoriality to the federal trademark statute, known as the Lanham Act. Writing for five, Justice Alito employed the Court’s familiar “two-step framework” for extraterritoriality. At step one of this framework, a court looks for a clear indication of extraterritoriality. Justice Alito found none in the Lanham Act. At step two, to determine whether applying a statutory provision would be domestic or extraterritorial, a court identifies the focus of a provision. The parties disagreed about the Lanham Act’s focus, but Justice Alito found it unnecessary to decide that question because of what he viewed as step two’s second half: whether conduct relevant to the focus occurred in the United States. The Lanham Act’s text and context indicated that “use in commerce” is the relevant conduct, Justice Alito reasoned, so such use had to occur in the United States.

Writing for four, Justice Sotomayor strongly disagreed. For her, applying a statutory provision “is domestic when the object of the statute’s focus is found in, or occurs in, the United States.” The Lanham Act’s text identified preventing consumer confusion as its focus, so the Act should apply whenever there is a likelihood of such confusion in the United States, without any additional requirement of “use in commerce” within U.S. territory. (Disclosure: I filed an amicus brief urging the position that Justice Sotomayor took.)

Justice Sotomayor faulted Justice Alito both for creating an “unprecedented three-step framework” and for collapsing the framework’s two steps into one, “transform[ing] the Court’s extraterritoriality framework into a myopic conduct-only test.” The latter description seems more apt to me. But either way, one thing seems clear: the presumption against extraterritoriality has changed again. In this post, I set this new presumption against extraterritoriality in historical context, explaining that it operates as a version of the older conduct-based presumption that the Court seemed to abandon in Morrison v. National Australia Bank (2010). I also explore the implications of this new (old) presumption against extraterritoriality for other statutes.

A Brief History of the Presumption

As I have noted before, the presumption against extraterritoriality has its origins in international law. During the late eighteenth and early nineteenth centuries, international law took a mostly territorial view of jurisdiction. Early U.S. courts applied a presumption that Congress does not intend to violate international law—known today as the Charming Betsy canon. Combine this canon with a territorial view of jurisdiction and you get a presumption against extraterritoriality (or perhaps more accurately against “extrajurisdictionality”) such as the one Justice Story applied in The Apollon (1824).

During the late nineteenth and early twentieth centuries, the international law of jurisdiction became less territorial. The Supreme Court responded not by abandoning the presumption but by grounding it in international comity rather than international law. To apply laws “other than those of the place where [the defendant] did the acts,” Justice Holmes wrote in American Banana Co. v. United Fruit Co. (1909), “would be an interference with the authority of another sovereign, contrary to the comity of nations, which the other state concerned justly might resent.”

Although the Supreme Court soon abandoned a territorial approach to U.S. antitrust law, it continued to apply the presumption for the next forty years. American Banana’s presumption was conduct-based: “the character of an act as lawful or unlawful must be determined wholly by the law of the country where the act is done.” The Court applied this presumption inconsistently, however, ignoring it in cases where conduct abroad caused harmful effects in the United States, like Ford v. United States (1927) (Prohibition Act), United States v. Sisal Sales Corp. (1927) (Sherman Act), and Steele v. Bulova Watch Co. (1952) (Lanham Act). After Steele, the Court stopped applying the presumption against extraterritoriality for nearly four decades.

The presumption was born again in EEOC v. Arabian American Oil Co. (Aramco) (1991), where the Supreme Court held that Title VII of the 1964 Civil Rights Act did not apply extraterritorially. Aramco’s presumption was also conduct-based, as one can see from subsequent decisions, like Pasquantino v. United States (2005) and Small v. United States (2005), in which the Court declined to apply the presumption when relevant conduct occurred in the United States. As happened after American Banana, however, the Court applied the presumption inconsistently, ignoring it when conduct abroad caused harmful effects in the United States, as in Hartford Fire Insurance Co. v. California (1993) (Sherman Act).

The New Presumption

The presumption changed in 2010 with Morrison v. National Australia Bank. Morrison was a securities fraud case, in which the alleged fraud occurred in the United States although the transaction affected occurred abroad. Morrison began, traditionally enough, by asking whether there was a clear indication that § 10(b) of the Securities Exchange Act applies extraterritorially (and found none). But Morrison then added a second step to the analysis, asking about the “focus” of § 10(b). Because § 10(b)’s focus “is not upon the place where the deception originated, but upon purchases and sales of securities in the United States,” the Court concluded that § 10(b) did not apply to transactions abroad even when fraudulent conduct occurred in the United States.

Six years later, the Court articulated a “two-step framework” for the presumption against extraterritoriality in RJR Nabisco v. European Community (2016):

At the first step, we ask whether the presumption against extraterritoriality has been rebutted—that is, whether the statute gives a clear, affirmative indication that it applies extraterritorially…. If the statute is not extraterritorial, then at the second step we determine whether the case involves a domestic application of the statute, and we do this by looking to the statute’s “focus.” If the conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad; but if the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.

Justice Alito wrote the opinion of the Court in RJR Nabisco. His addition of “conduct relevant to the statute’s focus” to the second step was puzzling. First, it was inconsistent with Morrison, which looked only at the location of the transaction—§ 10(b)’s focus—and not at the location of the conduct. One cannot say that Morrison used the focus to choose which conduct was relevant. As in many securities fraud cases, the defendants were not parties to the underlying transaction. The only conduct they engaged in was the alleged fraud. But Morrison found the location of that conduct irrelevant because the focus of § 10(b), the transaction, occurred abroad.

Nor did the Court require domestic conduct relevant to the statute’s focus in RJR Nabisco itself. In the last part of his opinion, Justice Alito applied step two to RICO’s private right of action, holding that, because the focus of that provision is injury to business or property, it “requires a civil RICO plaintiff to allege and prove a domestic injury to business or property and does not allow recovery for foreign injuries.” The Court said nothing about requiring conduct relevant to the injury to occur in the United States. Just as in Morrison, RJR Nabisco’s application of step two seemed to look exclusively to whether the focus of the provision occurred in the United States.

For these reasons, the Restatement (Fourth) of Foreign Relations Law (2018) ignored RJR Nabisco’s “conduct relevant to” language when restating the presumption against extraterritoriality. (Disclosure: I served as a reporter for the Restatement (Fourth).) Comment c to § 404 reads: “If whatever is the focus of the provision occurred in the United States, then application of the provision is considered domestic and is permitted.”

In 2020, I wrote an article entitled The New Presumption Against Extraterritoriality, in which I defended this new presumption as a better tool for effectuating congressional intent. “Morrison broke the link between the presumption and conduct,” I wrote, “by recognizing that the focus of congressional concern could be something other than conduct.”

Back to the Old Presumption

Abitron rebuilds the link between the presumption and conduct that Morrison broke. The presumption against extraterritoriality, Abitron emphasizes, is a “presumption against application to conduct in the territory of another sovereign” (emphasis added). The focus analysis, as Justice Alito reformulates it, is simply “designed to apply the presumption against extraterritoriality to claims that involve both domestic and foreign activity, separating the activity that matters from the activity that does not.” Step two, in other words, does not allow courts to apply federal statutes to foreign conduct even when the focus of congressional concern is something other than conduct, such as domestic transactions or domestic injuries. Courts should presume that Congress only intends to regulate conduct, and the purpose of the focus analysis is just to determine what conduct counts.

Abitron’s conduct-based presumption strongly resembles American Banana’s, presuming (as Justice Holmes put it) that “that the character of an act as lawful or unlawful must be determined wholly by the law of the country where the act is done.” Indeed, Abitron seems to go further than American Banana by suggesting that federal statutes might not apply even to conduct in the United States unless that conduct is relevant to the statute’s focus. In the decade after American Banana, the Supreme Court twice held that the Sherman Act applied to attempts to monopolize transportation routes between the United States and other countries, involving conduct both here and abroad. It is not clear that Abitron’s version of the presumption against extraterritoriality would do the same.

Abitron’s insistence on conduct in the United States is difficult to explain. Justice Alito writes that the presumption is partly based on the “commonsense notion that Congress generally legislates with domestic concerns in mind.” But domestic concerns are not limited to domestic conduct. As I noted many years ago, “what Congress is primarily concerned with is preventing harmful effects in the United States.” Justice Scalia recognized this in Morrison, which is why he held that it was not the location of the fraudulent conduct but rather the location of the transaction affected by that conduct that mattered. “Those purchase-and-sale transactions are the objects of the statute’s solicitude,” he wrote. “It is those transactions that the statute seeks to ‘regulate’; it is parties or prospective parties to those transactions that the statute seeks to ‘protect’” (cleaned up).

Justice Alito also writes that the presumption against extraterritoriality “serves to avoid the international discord that can result when U.S. law is applied to conduct in foreign countries.” But the executive branch did not advocate a conduct-based presumption in Abitron. Instead, it argued that federal laws should be applied whenever the focus of the statute is found in the United States, the position that Justice Sotomayor adopted. Applying the Lanham Act to foreign conduct likely to cause confusion in the United States, the executive argued, was perfectly consistent with U.S. treaty obligations. Despite having written in other cases that the executive branch has “the lead role in foreign policy,” Justice Alito apparently believes that the Supreme Court knows more than the executive about preventing international discord.

Abitron’s Implications for Other Statutes

Although some federal statutes do contain clear indications of geographic scope, many do not. This means that step two of the presumption against extraterritoriality does most of the work in determining the reach of federal law. Abitron suggests that, absent a clear indication of extraterritoriality, federal statutes should apply only to conduct in the United States.

One area where this may make a difference is federal securities law. As noted above, Morrison held that § 10(b) applies to transactions that occur in the United States. In Absolute Activist Value Master Fund Ltd. v. Ficeto (2012), the Second Circuit took the Supreme Court at its word and held that “the transactional test announced in Morrison does not require that each defendant alleged to be involved in a fraudulent scheme engage in conduct in the United States.” Indeed, the Second Circuit noted that Morrison had specifically rejected a conduct test for § 10(b). That holding is now open to question. Abitron says it is not enough for the focus of a federal statute to occur in the United States. Applying a statutory provision is not domestic and permissible unless “conduct relevant to the statute’s focus occurred in the United States.”

The Supreme Court might even reconsider the geographic scope of federal antitrust law. Hartford Fire Insurance Co. v. California (1993) held that the Sherman Act applies to foreign conduct that causes anticompetitive effects in the United States. The Court did not apply the presumption against extraterritoriality in Hartford, although one could reach the same conclusion under Morrison’s version of the presumption because the focus of the Sherman Act is preventing anticompetitive effects. Abitron, however, says there must also be conduct in the United States relevant to the statute’s focus.

One might argue that Hartford’s effects test must be preserved despite Abitron because of stare decisis. Stare decisis has “special force in the area of statutory interpretation,” and the Supreme Court has refused to overturn statutory precedents even when the rules of statutory interpretation on which those precedents rest have changed. But Abitron’s treatment of Steele does not inspire confidence. Steele held that the Lanham Act applied to use of a U.S. trademark in Mexico. In Abitron, Justice Alito tried to distinguish Steele on the ground that the case also involved “domestic conduct.” The problem is that this domestic conduct (buying parts for the counterfeit watches in the United States) was not relevant to consumer confusion or any other possible focus of the Lanham Act. Steele would have come out differently under Abitron. If Steele’s precedent did not prevent the Court from holding that the Lanham Act applies only to the use of trademarks in the United States, it is hard to be sure that Hartford’s precedent would prevent the Court from holding that the Sherman Act applies only to anticompetitive conduct in the United States.

These examples show the disruptive potential of the Supreme Court’s decision in Abitron. It is not just that lower courts may have to change the tests they now apply in securities and antitrust cases; it is that they may have to change those tests in ways that are inconsistent with what Congress wants. It seems reasonable to think, as Justice Scalia noted in Morrison, that Congress passed § 10(b) to protect transactions in the United States from fraud. It also seems reasonable to think, as Justice Souter noted in Hartford, that Congress passed the Sherman Act to prevent anticompetitive effects in the United States. An interpretation of either statute that additionally requires domestic conduct would thwart Congress’s intent by excluding cases—those involving only foreign conduct—about which Congress was concerned.

Conclusion

Abitron changes the presumption against extraterritoriality and thus the reach of federal law. Its “myopic conduct only test,” to use Justice Sotomayor’s phrase, reestablishes the presumption that the Supreme Court used at the start of the twentieth century and that Justice Scalia sensibly abandoned in Morrison.

Perhaps the Court will apply Abitron’s conduct-based presumption as inconsistently as it applied American Banana’s and Aramco’s. Abitron was, after all, a 5-4 decision made possible only by Justice Jackson’s inexplicable join. The Supreme Court generally does not treat decisions on interpretive methodology as precedential, so the Court could change the presumption yet again in a future case. Part of me hopes that the new (old) presumption against extraterritoriality will not last. But such instability in the reach of federal statutes is hardly good for American law.