The recent wave of US litigation between Lloyd's and its Names, mentioned in this column in the February 1997 issue of International Financial Law Review (see page 63) has provided an opportunity to test the limits of the enforceability of forum selection and choice of law clauses in the US. In these cases, various US Names who were participants in Lloyd's underwriting syndicates brought suit against Lloyd's, claiming, among other things, that Lloyd's violated the disclosure requirements of the US securities laws in soliciting their participation. The Names allege that Lloyd's failed to disclose the speculative and risky nature of their investments. Lloyd's moved to dismiss the complaints in these cases, most of which arise out of similar facts, on the basis that the parties agreed, in the contracts, to forum selection and choice of law clauses (the 'choice clauses') providing for resolution of all disputes in the English courts and under English law.
Six federal Courts of Appeals have addressed the issue of the enforceability of the choice clauses. Five of them have upheld the clauses, requiring the Names to litigate any disputes in the English courts. These courts have relied on Supreme Court cases holding that choice of law and forum selection clauses in international agreements should be enforced unless enforcement would be 'unreasonable' under the circumstances. The courts have found the enforcement of the choice clauses reasonable in large part because they have determined that the remedies available under English law are adequate to effect the anti-fraud policies underlying the US securities laws. Allen v Lloyd's of London (4th Cir 1996); Shell v RW Sturge (6th Cir 1995); Bonny v Society of Lloyd's (7th Cir 1993); Roby v Corporation of Lloyd's (2nd Cir 1993); Riley v Kingsley Underwriting Agencies (10th Cir 1992).
On the other hand, the Court of Appeals for the Ninth Circuit recently held, in Richards v Lloyd's of London, that enforcement of the US securities laws prevails over the parties' choice clauses. The Richards court held that enforcing the choice clauses would violate the anti-waiver provisions of the US securities laws, which prohibit parties from contracting out of the protections those statutes afford. The court emphasized that the anti-waiver provisions reflect a decision by Congress — which the courts are not to question — that enforcing the choice clauses would offend US policy. Significantly, the court viewed the remedies afforded under English law as inadequate substitutes "for the firm shields and finely honed swords provided by American securities law". Thus, the court concluded that the choice clauses were void and permitted the Names to pursue their federal claims against Lloyd's in the US court.
Extraterritorial application of US Law
In a concurring and dissenting opinion in the Richards case, Judge Goodwin noted that the decision of the majority pre-empts the enforceability of the choice clauses by applying US securities laws extraterritorially. He criticizes the majority for holding that US securities laws render void the terms of the agreements by which the Names became Lloyd's underwriters merely because the Names alleged that they had purchased a security. "The same reasoning," he concluded, "would bring protections under our securities laws to anyone who loses his or her savings betting on chicken fights in Zamboanga."
Recently, a number of important cases have addressed this controversial issue of limits on the extraterritorial application of US securities and antitrust laws. There is a general presumption against the application of US law to activities occurring outside the US — see EEOC v Arabian American Oil Co (US 1991) — which can be rebutted where Congress has expressed an intent that the US laws at issue apply to foreign conduct or where the foreign conduct has had a 'substantial effect' in the US. On the examination of these and other factors, courts have upheld the extraterritorial application of US securities laws (Alfadda v Fenn (2nd Cir 1991)) and US antitrust laws (Hartford Fire Insurance Co v California (US 1993)).
One US court recently explored previously uncharted terrain on the extraterritorial reach of US criminal antitrust laws. In United States v Nippon Paper Industries Co, the Court of Appeals for the First Circuit held that the US government could prosecute a Japanese corporation for criminal price-fixing in violation of the Sherman Act, based on conduct occurring entirely in Japan. The defendant in Nippon Paper was charged with engaging in a scheme to fix the price of facsimile paper throughout North America which allegedly resulted in the sale of paper at inflated prices to US customers.
The Court of Appeals acknowledged the presumption against applying US laws extraterritorially. Nonetheless, the court reasoned that because the statute's jurisdictional clause — which provides that the statute applies to "commerce ... with foreign nations" — had been interpreted in the civil context to apply to extraterritorial conduct, it should be interpreted in the same way in the criminal context. In addition, the court found highly persuasive the civil cases establishing that foreign conduct having an "intended and substantial effect" in the US falls within the statute's jurisdictional reach.
While some courts appear to be extending notions of extraterritoriality, other US courts continue to articulate limits on the reach of US law to foreign conduct. For example, in Mak v Wocom Commodities, the Court of Appeals for the Seventh Circuit recently affirmed a district court's decision that there was no jurisdiction, under the Commodity Exchange Act, over claims arising from allegedly fraudulent commodity and futures trading which occurred in Hong Kong.
The court applied two tests to determine whether jurisdiction existed over the international dispute: the 'conduct' test, under which a court analyzes the allegedly fraudulent conduct which occurs within the US; and the 'effects' test, under which a court evaluates whether extraterritorial conduct has caused foreseeable and substantial harm to domestic interests. The court concluded that there was no jurisdiction under either standard. There was no jurisdiction under the conduct test because the plaintiff's investments never left Hong Kong, no transaction was executed on a US exchange and no other relevant event took place in the US. There was no jurisdiction under the effects test because there was no sufficiently direct effect on US interests to support a finding of jurisdiction. Although there may be some general harm to US markets as a result of totally foreign fraudulent conduct which diverts trades intended for execution on US exchanges, the court concluded that "[t]he threshold for [the effects] test must not be so low as to involve our courts in matters totally foreign or largely unrelated to our interests".
John J Kerr, Jr and Jennifer S Dominitz
Simpson Thacher & Bartlett