Class Action Raising Predominantly Non-U.S. Law Claims Dismissed on the Basis of Comity

Class Action Raising Predominantly Non-U.S. Law Claims Dismissed on the Basis of Comity

By Louis M. Solomon

Toyota Motor Corp. Securities Litigation, cv 10-922 DSF (AJWx) (C.D. Cal. July 2011) [enhanced version available to subscribers], addressed claims asserted both under the Private Securities Litigation Reform Act and under Japanese law arising out of Toyota's recall of Toyota and Lexus brand cars, which cost roughly $4 billion and caused stock value loss of 11%.   The Distirct Court addressed many securities law issues.  Of greater interest to international litigation practice generally is the Court's discussion of the non-U.S. law claims asserted as one of the theories of liability. 

Most of the purchasers and sellers of shares were Japanese.  It might be theorized that such purchasers or sellers might have claims under Japanese law.  There is no reason under the governing precedents discussed in the decision why a U.S. court could not apply Japanese law to the dispute.  Indeed, the District Court concluded that it had supplemental jurisdiction over such claims, since "the Japanese law claims form part of the same case or controversy and arise from a common nucleus of operative facts as the American securities fraud claims".  See 28 U.S.C. § 1367(c). (See our discussion of supplemental jurisdiction as applied to international dispute resolution in our e-book, International Practice, Topics and Trends.)

Nonetheless, the District Court declined to exercise supplemental jurisdiction.  Typically federal courts are said to have "virtually unflagging obligations" to exercise jurisdiction in cases properly before them.  E.g.,  Colorado River Conserv. District v. U.S., 424 U.S. 800 (1976) [enhanced version available to subscribers / unenhanced version available from lexisONE Free Case Law].  However, the Supplemental Jurisdiction statute, Section 1367, permits the Court to "decline to exercise supplemental jurisdiction over a claim under subsection (a) if-

(1) the claim raises a novel or complex issue of State law,
(2) the claim substantially predominates over the claim or claims over which the district court has original jurisdiction,
(3) the district court has dismissed all claims over which it has original jurisdiction, or
(4) in exceptional circumstances, there are other compelling reasons for declining jurisdiction."

The District Court's reasons for declining to exercise supplemental jurisdiction here included that the Japanese law claims substantially predominate over the American law claims and the "exceptional circumstance of comity to the Japanese courts also strongly argues against the exercise of supplemental jurisdiction".  Said the District Court:

The clear underlying rationale of the Supreme Court's decision in Morrison v. Nat'l Australia Bk., Ltd., 561 U.S. __, 130 S.Ct. 2869 (2010) [enhanced version  / unenhanced version ], is that foreign governments have the right to decide how to regulate their own securities markets. This respect for foreign law would be completely subverted if foreign claims were allowed to be piggybacked into virtually every American securities fraud case, imposing American procedures, requirements, and interpretations likely never contemplated by the drafters of the foreign law.


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