The U.S. Supreme Court's June 2010 decision in Morrison v. National Australia Bank looked like the end
of securities claims in U.S. courts on behalf so-called "f-cubed" claimants -
that is, foreign shareholders of foreign-domiciled companies who bought their
shares on foreign exchanges. In the aftermath of Morrison, these foreign
claimants have pursued a number of avenues to pursue their claims, including,
for example, initiating
litigation in the defendant company's home jurisdiction.
Among the more creative approaches was the attempt to
pursue - in U.S. courts - claims on behalf of non-U.S. claimants under the laws
of the claimants' home country. The highest-profile attempt along these lines
emerged in the Toyota
shareholder litigation pending in the Central District of California, where
the plaintiffs had amended their complaint in shareholder arising from the
company's sudden acceleration problems to assert claims under the Japanese Financial
Instruments and Exchange Act. The plaintiffs had substantial
incentive to pursue this approach since only a small fraction of the company's
shares (less than 10 percent) trade in the U.S. as American Depositary Shares.
However, in a July 7, 2011 opinion (here),
Central District of California Dale Fischer made short
work of this attempt to circumvent the impact of the Morrison decision.
In her July 7 ruling, Judge Fischer rejected the plaintiffs' argument that the
court had original jurisdiction over plaintiffs' Japanese law claims under
the Class Action Fairness Act (CAFA). She further declined to exercise the
court's supplemental jurisdiction over the claimants' Japanese law claims. He
dismissed the plaintiffs' Japanese law claims with prejudice.
In seeking to argue that the court had original
jurisdiction over their Japanese law claims, the plaintiffs' had contended that
because Toyota shares were listed but did not trade on the New York Stock
Exchange, they were not a "covered" security to which CAFA applied, and,
because CAFA did not apply, they could assert claims in U.S. court under
Japanese law even though they could not otherwise assert claims under U.S. law.
(I have attempted to summarize the plaintiffs' CAFA arguments as best I could;
Alison Frankel has a more thorough discussion of these issues in her July 11,
2011 Thomson Reuters News & Insight article entitled "Morrison End
Run Hits Brick Wall in Toyota Case" (here)).
Judge Fischer declined to read into CAFA the requirements that plaintiffs
urged, as "to do so would ignore the plain language of the statute."
Judge Fischer's refusal to exercise supplemental
jurisdiction over the Japanese law claims is even more interesting, and is
likely to spell the end of most future attempts by f-cubed claimants to try to
assert claims in U.S. under foreign law. Among other things, because of the
vast predominance of Japanese holders, "the damages analysis would focus
overwhelmingly on these claims" and the Japanese law claims "unquestionably
would dominate the litigation."
Judge Fischer also found that the requirement of comity
to Japanese courts "strongly argues against the exercise of supplemental
jurisdiction." He added that the respect for the rights of other countries to
regulate their own securities markets "would be subverted if foreign claims
were allowed to be piggybacked into virtually every American securities fraud
case," which would result in "imposing American procedures, requirements and
interpretations likely never contemplated by the drafters of the foreign law."
Judge Fischer did not say that there would never be an
occasion when a U.S. court could properly exercise supplemental jurisdiction
over foreign securities fraud claims. However, he specifically noted that "any
reasonable reading of Morrison suggests that those instances will be
Whether or not any readers consider this outcome
unexpected, the one thing that is clear is that the U.S. District Courts
continue to take an expansive reading of Morrison. As Frankel put it in
her article to which I linked above, the Toyota plaintiffs "fared no better
than everyone else who's tried to find any vulnerability in the Supreme Court's
M&A Litigation Soaring, For Sure: In
my first half 2011 securities litigation analysis (here)
one of the most distinctive trends I noted was the rise of M&A related
litigation. Fox Business News has a July 12, 2011 article entitled "M&A
Lawsuit Skyrocket as Fee-Hungry Law Firms Smell Easy Money" (here)
which takes a closer look at the subject.
The article sounds themes that will be familiar to
readers of this blog. However, the article is accompanied by a startling
graphic that dramatically illustrates how massively the M&A-related
litigation has ramped up since 2008. The article graphics also show how the
M&A-related litigation has grown relative to M&A-related activity. In
addition, the article provides numerical substantiation for the generalizations
about the rising levels of M&A litigation.
I continue to believe that in the aggregate, these cases
represent a serious problem for the D&O insurance industry, or at least for
the carriers that are most active as primary carriers. I expect the increasing
frequency of M&A -related litigation will be of increasing focus in the
Second Quarter Litigation Update Webinar: And
speaking of first half 2011 litigation filing trends, on Tuesday July 19, 2011
at 11 a.m. EDT, I will be participating in the Advisen's "Q2
Securities Litigation Webinar." My fellow panelists will include
Anderson Kill's Bill Passanante, Navigators' Scott Misson, and
Willis' John Connolly. The panel will be moderted by Advisen's Jim Blinn.
Information about registering for this event, which is free, can be found here.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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