Courts have long grappled with how to apply state and federal laws to disputes that arise entirely outside U.S. borders, sometimes concluding that such laws should not be applied extraterritorially at all. Earlier this year, the New York Court of Appeals weighed in on this issue in an antitrust case, Global Reinsurance Corp. v. Equitas Ltd. et al., 969 N.E.2d 187 (N.Y. 2012) (“Global Re”), holding that New York law did not extend to an alleged antitrust violation involving foreign defendants and a foreign conspiracy. The case itself turned on the Court’s interpretation of the Donnelly Act, New York’s antitrust statute; but litigants may try to extend the decision to cases involving non-antitrust claims, such as securities violations and various business torts. Whether or not those efforts are successful, Global Re highlights the potential problems that can arise when state-law claims based on international conduct are asserted. Maintaining these types of claims requires careful pleading, particularly in the wake of Global Re. Litigants contemplating claims based on foreign transactions should consider the full range of available options—including not only litigation, but aggressive arbitration—a strategy the Global Re plaintiff was ultimately forced to employ.
The Global Re Decision
Global Re arose out of a retrocessionary reinsurance dispute. Retrocessionary reinsurance is global reinsurance that covers a variety of risks, including so-called “non-life” coverages for environmental, catastrophic, and asbestos-related exposures. By the early 1990s, it was clear that a number of reinsurers had issued “non-life” retrocessionary policies without appreciating the long-term liabilities that these policies could cover (e.g., significant losses from asbestos liability). As claims began to mount, some reinsurers concluded that their exposure under these policies could outstrip reserves. Global Re, 969 N.E.2d at 189.
One such group was Lloyd’s of London, a London-based insurance market comprised of competing underwriters. Lloyd’s members concluded they could not stem rising “non-life” liabilities without concerted action; if underwriters individually imposed difficult hurdles on “non-life” claims, those underwriters could no longer compete for new business against other companies that were not imposing these same hurdles. Id. Lloyd’s members therefore created a new entity, Equitas—the defendant in the Global Re case—to assume obligations under existing “non-life” retrocessional reinsurance policies. Equitas was given free rein to handle claims arising under these policies. It immediately took a “hard-nosed” approach aimed at limiting exposure, including burdensome documentation requirements that led to the denial of many claims. Id. at 189-90.
Plaintiff Global Reinsurance Corporation (“Global Re”) was the U.S. branch of a German reinsurance company that had purchased retrocessional coverage through Lloyd’s. Global Re believed Equitas’ new claim resolution procedures caused denials on claims that would have been approved by individual Lloyd’s members. Because Equitas’ procedures were only possible due to the elimination of competition among other retrocessional reinsurers in the Lloyd’s marketplace, Global Re’s New York branch filed Donnelly Act claims in New York court, alleging that the merger of individual reinsurers into Equitas suppressed competition in the retrocessional reinsurance market. The complaint alleged that while individual participants in the Lloyd’s marketplace were once “disposed to settle claims expeditiously and fairly” because they “competed with each other for new business and were thus anxious to curry favor” with potential customers, Equitas eliminated “any competitive disincentive to the adoption of sharp claims management practices.” Id. at 190-91.
The trial court dismissed the Donnelly Act claim, concluding the complaint failed to adequately allege market power. The Appellate Division reversed and reinstated, finding market power had been adequately alleged, and that Defendants’ other argument for dismissal—that a London-based conspiracy to restrain trade was not actionable under the Donnelly Act even if market power was adequately alleged—also did not warrant dismissal. Id. at 191-92.
The Court of Appeals reversed. The Court concluded that market power was not adequately alleged in the complaint; for example, coverage available from Lloyd’s participants could presumably be obtained on competitive terms elsewhere after Equitas was formed. Thus, no Donnelly Act claim was adequately alleged. Id. at 194.
But the Court’s analysis did not end there. The Court then proceeded to address a much broader question: whether, if market power had been adequately alleged, the Donnelly Act could ever extend to a claim for injury inflicted by a foreign defendant, caused by a foreign conspiracy, whose impacts were felt in New York only because a participant in the worldwide market happened to be located in New York. On that question, the Court held the complaint failed to set out a sufficient case for applying the Donnelly Act:
Injury so afflicted, attributable primarily to foreign, government approved transactions having no particular New York orientation and occasioning injury here only by reason of the circumstance that plaintiff’s purchasing branch happens to be situated here, is not redressable under New York State’s antitrust statute.
In reaching that conclusion, the Court noted the presumption against applying New York statutes extraterritorially, observing that this presumption is especially strong where corresponding federal law was expressly limited so as not to apply extraterritorially: “The established presumption is, of course, against the extraterritorial operation of New York law, and we do not see how it could be overcome in a situation where the analogue federal claim would be barred by congressional enactment.” Id. The Court acknowledged, however, that extraterritorial application of the Donnelly Act might be warranted in some circumstances:
For a Donnelly Act claim to reach a purely extraterritorial conspiracy, there would, we think, have to be a very close nexus between the conspiracy and injury to competition in this state. That additional element is not discernable form the pleadings before us.
Id. at 196. Plaintiff failed to establish any nexus to New York, much less a “very close nexus”: it did not allege injury to competition in New York, focusing instead on constrained competition in a London-based market (Lloyd’s) that allegedly caused worldwide injuries—not injuries with any particular and special connection to New York. Id. Thus, the court concluded that even if market power had been adequately alleged, and even if a Sherman Act claim had been stated, no Donnelly Act claim was possible based on the complaint.
The Potential Impact of Global Re on New York Litigants
In the wake of the Global Re decision, commentators have suggested that defense counsel might use Global Re to limit the territorial reach of New York law generally. Global Re specifically held only that antitrust plaintiffs cannot avoid the Sherman Act’s territorial limitations by bringing claims under the Donnelly Act, but some commentators suggest that defendants should argue that claims of any sort under New York law are barred by Global Re when they would apply New York law extraterritorially.
Those sorts of arguments seem likely in securities-related litigation, where federal claims arising out of foreign conduct have been limited in recent years. The Supreme Court’s decision in Morrison v. National Australia Bank, 130 S.Ct. 2869 (2010), limited claims under Section 10(b) of the Securities Exchange Act and Rule 10b-5 to those involving securities listed on American exchanges or securities purchased or sold in the United States. Morrison dismissed so-called “F-cubed” claims that involved (1) foreign investors, (2) a foreign defendant, and (3) a foreign securities transaction. The Court broadly rejected the “F-cubed” claims under federal law, on the rationale that extraterritorial application of federal laws should not be presumed absent an express congressional statement to that effect:
It is a “longstanding principle of American law ‘that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’” … Thus, “unless there is the affirmative intention of the Congress clearly expressed” to give a statute extraterritorial effect, “we must presume it is primarily concerned with domestic conditions.” … When a statute gives no clear indication of an extraterritorial application, it has none.
Morrison, 130 S.Ct. at 2877-78 (citations omitted).
In the wake of Morrison, plaintiffs in securities-related cases used state statutory and common-law claims to address injuries where no federal causes of action existed. In Terra Sec. ASA Konkursbo v. Citigroup, Inc., 740 F. Supp. 2d 441 (S.D.N.Y. 2010), for example, the court dismissed foreign plaintiffs’ federal securities law claims against Citigroup under Morrison because the transactions at issue took place on a foreign exchange. Id. at 447. But the court denied a motion to dismiss plaintiffs’ common-law fraud claims, finding that plaintiffs adequately alleged reliance and causation. Id. at 454-55.
Before Global Re, efforts to use state law as a substitute for federal securities laws were on the rise. Those efforts received a boost from a recent New York Court of Appeals decision, Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., 962 N.E.2d 765 (N.Y. Dec. 20, 2011), which held that the Martin Act (a New York securities fraud and enforcement statute) does not preempt claims under New York common law in securities-related cases. Plaintiff Assured Guaranty sued J.P. Morgan for breach of fiduciary duty, gross negligence, and breach of contract based on mismanagement of a portfolio that was insured by Assured Guaranty. J.P. Morgan moved to dismiss, arguing that plaintiff’s claims were preempted by the Martin Act because they involved allegations of securities and investment fraud that were the exclusive purview of the New York Attorney General under the Martin Act. The Court rejected that argument, finding nothing in the legislative history of the Martin Act expressly indicating that it was meant to preempt common-law claims by civil plaintiffs. Id. at *6 -7. This decision rebuffed a line of cases finding common-law claims preempted under New York law. See, e.g., Horvath v. Banco Comercial Portuges, S.A., 2011 WL 666410, at *7-8 (S.D.N.Y. Feb. 15, 2011) (in case involving foreign transaction, dismissing federal securities claims under Morrison and also dismissing common-law claims for aiding and abetting and negligent misrepresentation as precluded by the Martin Act).
In future suits involving foreign transactions, defendants may try to use Global Re to stem the tide of state-law claims authorized by Assured. Defendants are likely to argue that even where New York common law claims are not preempted by the Martin Act, they are precluded by Global Re if they would apply New York law extraterritorially and regulate international conduct.
Plaintiffs may face similar arguments based on Global Re when bringing claims under New York’s Organized Crime Control Act (“OCCA”), the state analogue to the federal Racketeer Influenced and Corrupt Organizations (“RICO”) Act. In recent years, some courts have refused to apply RICO to conduct occurring entirely abroad, citing Morrison as a general limitation on extraterritorial application of federal law. See, e.g., Cedeño v. Castillo, No. 10-cv-3861, 2012 WL 205960, at *37 (2d Cir. Jan. 25, 2012). Defendants may similarly argue that cases barred by territorial limits on RICO should not be authorized under OCCA.
Indeed, defendants may try to use Global Re to limit the scope of nearly any state-law action involving foreign acts, including claims relating to intellectual property rights. For example, a New York fashion designer recently sued Japanese companies in New York for merchandise sales in Japan that allegedly violated the designer’s trademarks and trade dress rights. The suit involved claims under the Lanham Act, claims under the New York General Business Law, and claims for common-law trade dress infringement, all arising out of these foreign sales. Defendants moved to dismiss the Lanham Act claims based on Morrison, and similarly cited Global Re to argue for a general presumption against extraterritorial application of New York law. See Jill Stuart (Asia) LLC v. Sanei Int’l Co., Ltd., 2012 WL 3601203 (S.D.N.Y. June 1, 2012). Similar arguments could be made in essentially any substantive area of law where New York plaintiffs seek to recover for wrongs committed abroad.
Avoiding the Pitfalls of Global Re Going Forward
Defendants’ efforts to convert Global Re into a general prohibition on state-law claims may be legally misguided. Global Re involved the extraterritorial scope of a New York statute—not claims under New York common law. The authority cited by the Court of Appeals for a presumption against the extraterritorial application of that statute was a treatise on New York statutory law—McKinney’s Consolidated Law of NY, Book 1, Statutes § 149—which states that “every statute in general terms is construed as having no extraterritorial effect” (emphasis added). Global Re’s emphasis on legislative history and congressional intent regarding territorial scope does not speak common law claims. Plaintiffs seeking to recover losses stemming from foreign transactions may argue that common-law claims simply are not implicated by the statutory presumptions discussed in Global Re or Morrison.
Moreover, plaintiffs can and should anticipate Global Re-style arguments in future cases involving foreign transactions, and avoid the pleading pitfalls that ensnared the Global Re plaintiff. In Global Re, the Court’s opinion repeatedly emphasized that the complaint alleged “a purely extraterritorial conspiracy,” where “[t]he only harm to competition alleged is within a particular London reinsurance marketplace” and that “only incidentally affected commerce in this country” through “transactions having no particular New York orientation and occasioning injury here only by reason of the circumstance that plaintiff’s purchasing branch happens to be located [in New York].” Global Re, 969 N.E.2d at 194-95 (emphases added).
To head off Global Re arguments, Plaintiffs should make efforts to avoid pleading purely foreign transactions with local injuries that are incidental. For example, to the extent possible, plaintiffs should set forth some acts underlying the transaction that occurred in or were specifically directed at New York—such as pre-transaction correspondence directed to New York, meetings in New York, and the like. Plaintiffs should also highlight the predictability of injuries suffered in New York—for example, identifying evidence that defendants actually knew New York residents would be harmed by their conduct. With careful analysis and thorough pre-filing investigations, plaintiffs may be able to satisfy the “very close nexus” standard Global Re articulated.
Arbitration the Answer?
Whatever the impact of Global Re on state-law claims, the outcome of that case highlights another issue: as New York courts, federal courts, or other courts restrict the availability of litigation to redress harms from foreign transactions, international arbitration will become increasingly important. For example, after Global Re’s claims under New York law were all dismissed, Global Re’s only hope of recovery was arbitration—specifically, an international arbitration proceeding against underwriters, seeking damages for alleged abuses under insurance treaties. Id. at 194 (noting plaintiffs were “pursuing contract claims against Lloyd’s underwriters in arbitration based on the same claims handling practices presently alleged”). Plaintiffs in future cases involving foreign defendants and foreign transactions need to carefully consider their opportunities for arbitration, and aggressively pursue arbitral awards as part of their global litigation strategy. A litigation-only approach would have left Global Re without avenues for recovery after its state-law claims were dismissed. Plaintiffs considering whether to assert U.S. claims in future cases involving foreign transactions should not overlook the importance of instituting arbitrations, and making forceful efforts to maximize recoveries in those arbitrations.