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Global Class Action Litigation

Lawsuits May Force U.S. Courts into Serving as Police Officers for the World

By Ed Silverstein

Recently, a class action lawsuit was brought for shareholders against National Australia Bank (NAB) accusing them of misstatements in the company’s disclosure materials. What’s different about this case is that it was brought in U.S. federal court.

The company moved to dismiss all of the non-U.S. plaintiffs in the case, Morrison vs. National Australia Bank Ltd., on grounds that NAB’s wrong, if any, was committed in Australia and should be governed by Australian not American law.

There is no reason why people with no connection with U.S. courts can sue a company that is incorporated elsewhere for conduct that violates Australian law, the company contends. Most of the plaintiffs live in Australia or Europe, with a small percentage living in the United States.

Can non-U.S. investors sue a non-U.S. corporation for making misstatements in disclosure materials merely because the underlying facts described in the disclosure relates to a U.S. activity?

The Decision

A lower U.S. District Court said no. The decision was appealed to the Second Circuit Court of Appeals. The Washington Legal Foundation (WLF), a pro-business organization, has filed a brief supporting the defendant’s position.

“This case is a prime example of how U.S. courts and laws are being used to adjudicate cases that are better suited for foreign courts and jurisdiction,” says Paul Kamenar, WLF’s senior executive counsel.

Louis Cohen, a former deputy solicitor general during the Reagan Administration now working as a senior counsel for WilmerHale, was a co-author of the WLF brief.

“It would be very wrong for the (appeals) court to reverse this,” Cohen explains. “U.S. law doesn’t govern what an Australian company ought to tell its Australian and other non-U.S. shareholders.”

Why is it a bad idea? Cohen explains:

* It further clogs up the U.S. courts. The U.S. court dockets are already very crowded. “CEOs in litigation will say it takes forever to get a decision,” Cohen says. For example, the National Australia Bank case is still before the Second Circuit Court of Appeals. Cohen suspects it may not be until late 2008 before the court issues a decision.

* It is an international relations issue. If U.S. courts act aggressively against foreign companies, foreign countries may reciprocate. They could pass new laws. They may go on the offensive. U.S. officers of U.S. corporations could be sued and judged under foreign law.

* There could be an effect of discouraging foreign investment in the U.S. It opens foreign companies up to a lawsuit in the U.S. on a behalf of a worldwide set of investors or shareholders. There is a risk that all of a company’s shareholders all over the world, if something goes wrong and they lose money, will be able to sue in the U.S. It would bring enormous exposure and expenses compared to a company making a relatively small investment in the U.S. Companies would have to take this risk into account before considering investing in U.S. markets.

The WLF further argues the Australian bank’s allegedly misleading disclosures were not U.S. conduct, and that the U.S. source of the alleged misinformation does not make U.S. law applicable to disclosures that occurred outside of the U.S. Second, WLF argues there is a well-established presumption, unless otherwise made expressly clear, that Congress does not intend for U.S. laws to apply to actions outside the territory of the United States. Third, a ruling that would provide a cause of action for non-U.S. investors for statements made by foreign companies merely because the alleged misinformation originated in the U.S. would greatly discourage foreign investment in the U.S.

John C. Coffee Jr., a law professor at Columbia University and director of its Center on Corporate Governance, notes that recent reports have warned that U.S. capital markets are already losing their competitiveness and that foreign firms actually fear entering the U.S. markets.

He further explains that foreign issuers that enter the United States often list only a small proportion of their shares on a U.S. exchange. So it may not be worth it for them to face a costly legal risk.

Second, securities class action is not available elsewhere in the world, with the possible exceptions of Canada and Australia.

But if a company’s stock price falls suddenly, it becomes potentially liable to a worldwide class of investors who could not otherwise sue it collectively except perhaps in the U.S.

Coffee describes these cases—foreign purchasers who bought a foreign issuer’s securities on a foreign exchange—as an “f-cubed class.” They are getting attention.

Coffee says that both Royal Ahold and Nortel Networks have recently settled class actions in U.S. courts for more than $1 billion each, and Royal Dutch Shell has agreed to pay more than $400 million to foreign investors in a settlement class action in the Netherlands to escape a global class action in the United States.

With an increasingly global economy and American plaintiffs’ attorneys eagerly searching for cases, more global class action litigation could be on the horizon. “The U.S. is now being asked to serve as the policeman of the world,” Coffee cautions. Now, attention is turned to the Australia Bank decision. “The results in this case will be closely watched,” Coffee said.

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