The Long(er) Arm Of The Law: Personal Jurisdiction In Securities Actions

Tuesday, June 30, 2009 - 01:00

Many factors come into play when parties decide whether to resolve their disputes through litigation in state versus federal court. Relevant differences between the two systems include their respective jury pools, the perceived quality of the judiciary, the speed with which the litigation can be expected to move forward, and procedural rules with which lawyers may have differing levels of familiarity and comfort. Plaintiffs' attorneys often forgo causes of action arising under federal law, for instance, in order to ensure that a defendant cannot remove a case to federal court, where judges may be perceived as more familiar with and receptive to certain types of motions, or where the body of defendant-friendly law may be more developed. Defendants remove cases for just those same reasons.

One factor that usually does not enter into the federal-versus-state-court calculus, however, is personal jurisdiction. Personal jurisdiction refers to the territorial power of a state to summon a particular defendant before it, grounded in the limits imposed by the Fourteenth Amendment to the U.S. Constitution. The typical personal jurisdiction analysis centers on a defendant's contacts with a forum - that is, with a particular state - and it inquires whether, based on those contacts, it would be fair to that defendant to seek to hold him accountable in a court within the state. States are free to determine the extent of the jurisdictional reach over those who can be haled into their courts, but their long-arm statutes cannot exceed the limits of due process imposed by the Fourteenth Amendment.

Questions relating to courts' abilities to obtain personal jurisdiction over a particular defendant are not usually germane to choosing between state and federal courts for a simple reason: federal courts apply the same personal jurisdiction rules as the states in which they sit, so the analysis in either court is, by definition, identical. Parties on either side of the "v" thus get little bang for their buck - at least in terms of which defendants can be haled into which court, federal or state - in choosing between state and federal court.

But this simple syllogism governing the concomitant reach of personal jurisdiction in state and federal courts is not absolute. There are a small number of federal statutes that provide for service upon a defendant, but not according to the long-arm statutes and service rules of the state in which a district court sits. These statutes permit service on a defendant anywhere within the territorial limits of the United States, and they include the Securities and Exchange Act of 1934 ("'34 Act"), the Federal Interpleader Statute, the Federal Sovereign Immunities Act, the Clayton Act, and the Racketeer Influenced and Corrupt Organizations Act ("RICO").

Some courts have viewed these statutes as creating a different playing field in terms of jurisdiction over a defendant, what is often referred to as a "national contacts" approach. Under a national contacts view of personal jurisdiction, the contacts of a defendant served within the United States pursuant to a statute allowing for nationwide service of process are not examined and evaluated solely with respect to a particular state . Instead, where a defendant has been served within the nation in, say, a 10b-5 securities fraud action under the '34 Act, courts focus on the aggregate contacts of the defendant with the United States taken as a whole . The court adds up the defendant's contacts with each individual state and, if they are together sufficient to make the exercise of jurisdiction comport with traditional notions of fair play and substantial justice, then the court's assertion of personal jurisdiction over that defendant is proper.

If and to the extent there is (or need be) a doctrinal justification for applying different personal jurisdiction rules for cases involving statutes providing for nationwide service of process, courts have held that personal jurisdiction is governed in those instances by the Due Process Clause of the Fifth Amendment, applicable to the federal government, and not that of the Fourteenth Amendment, which applies only to the states.

So far, so good. For courts adopting the national contacts approach for federal statutes like the '34 Act, the Fifth Amendment jurisdictional analysis with respect to a particular defendant can simply be thought of as the whole that is the sum of the Fourteenth Amendment's state-by-state contacts and fairness parts. Personal jurisdiction will be governed by the familiar factors set forth in International Shoe and its progeny, and courts will focus on the nature and extent of a defendant's contacts with, and the fairness of subjecting a defendant to a lawsuit within, a particular state or, here, a group of states.

But can the whole be more than the sum of its parts? That is, are there situations in which the sum of a defendant's contacts with the nation as a whole can be deemed sufficient to establish jurisdiction over the person for a securities fraud claim, but where those same contacts, had they been directed to any one state, would have been insufficient to satisfy the Fourteenth Amendment under a traditional personal jurisdiction due process analysis? Courts have increasingly begun to turn in this direction. This is a change that can have important ramifications for foreign defendants in certain action attempting to argue that their contacts with the United States are insufficient for them to be sued here, or who claim that for them to defend against a lawsuit within the United States would be unfairly burdensome and inconvenient.

To see the change that has begun taking place, a good starting place is the old personal jurisdiction stalwart, World-Wide Volkswagen Corp. v. Woodson , 444 U.S. 286 (1980). In World-Wide Volkswagen , the Supreme Court held that an Oklahoma court could not exercise personal jurisdiction over companies from another state involved in the sale of the car that plaintiffs had purchased, driven to Oklahoma, and gotten involved in an accident there. The Court reached this result by concluding that there had been no meaningful contact between the defendants and the forum state. World-Wide Volkswagen is important in the lexicon of personal jurisdiction case law for emphasizing that, while foreseeability is one factor in analyzing the relevant due process question, courts should consider more than whether something sold by a defendant had made its way to another forum through the stream of commerce and resulted in injury. Instead, World-Wide Volkswagen asked whether a defendant's connection to the forum state was sufficient such that he could have reasonably anticipated defending against a lawsuit there. Key to this inquiry is a defendant's purposefully directing his activities toward the forum state, and his availment of the privileges of conducting activities within the forum. As the World-Wide Volkswagen defendants' only tie to Oklahoma was the fact that the car they sold had been driven to Oklahoma and smashed up, they could not be haled into an Oklahoma court.

But that was then. Add to the picture an increasingly global economy, with the means to conduct sophisticated business in far-away lands perhaps unimagined in 1980, and a potential to commit wrongdoing that has become equally expansive. World-Wide Volkswagen , in this context, begins to look increasingly antiquated, and courts have begun, consciously or not, to take note. In place of an automobile retailer and wholesaler with no direct contacts with the forum, substitute a Lebanese entity accused of insider trading under the '34 Act who traded in shares listed on a United States exchange through a foreign affiliate of an American broker. See SEC v. Unifund SAL , 910 F.2d 1028 (2d Cir. 1990). Or an Australian accounting firm that signed an audit that was incorporated into a United States securities filing, accused of securities fraud. See Reingold v. Deloitte Haskins & Sells , 599 F. Supp. 1241 (S.D.N.Y 1984). Or an Italian national working for a Swiss company in Switzerland accused of improperly causing stock of a foreign entity trading on a United States exchange to be purchased through a broker in Switzerland. See SEC v. Euro Sec. Fund, Coim SA , no. 98-civ-7347(DLC), 1999 WL 76801 (S.D.N.Y. Feb. 17, 1999). In all these cases (and more), courts have found personal jurisdiction proper under the Fifth Amendment for claims asserted under the '34 Act.

Courts finding proper the exercise of jurisdiction over defendants such as these have focused on the fair play and substantial justice prong of the International Shoe analysis. They have emphasized the paramount interest of the United States in regulating and maintaining the integrity of its securities markets, an interest that no other forum has. See Euro Sec. Fund , 1999 WL 76801, at *4. They have observed that no other country may have jurisdiction over the claims asserted. See id . They have noted that what is essential is the effects of the wrongdoing alleged on shareholders within the United States. See Unifun , 910 F.2d at 1033. And they have insisted that the factual background of these international securities frauds makes it reasonable for these foreign defendants to expect to be haled into court when the wrongdoing is brought to light. See Reingold , 599 F. Supp. at 1260.

Is this right? Can these holdings be squared with the personal jurisdiction rules derived from World-Wide Volkswagen ? On the one hand, if jurisdiction can be had over defendants such as these, it is possible that many involved in international finance, for example, could find themselves subject to the personal jurisdiction of a United States court. As one court has noted, addressing foreign defendants accused of preparing false and misleading statements relating to securities traded on a London exchange, the exercise of personal jurisdiction by a United States court under the facts at hand could lead to the scenario in which "accountants operating solely in London could be subjected to personal jurisdiction in any country whose citizen had purchased stock of a company they had audited ." Leasco Data Processing Equip . Corp. v. Maxwell , 468 F.2d 1326, 1342 (2d Cir. 1972). It concluded that, "[a]lthough such worldwide reliance may be, in a sense, foreseeable, it is not sufficiently so to constitute a basis of personal jurisdiction consonant with due process." Id.

This approach to personal jurisdiction is not likely to prevail in the long run, however, for a number of reasons. First, the federal statutes providing for nationwide service of process, by which courts can exercise personal jurisdiction over foreign entities lacking activity in or directly tied to the United States as a whole, are few. Those statutes moreover include some of the most powerful weapons available to plaintiffs and government regulators in stamping out fraud and wrongdoing, such as 10b-5 and RICO claims. Further, different policy arguments come into play with federal securities laws vis-à-vis states' power under the Fourteenth Amendment, stemming from the different constitutional sources of jurisdictional power. For example, the comity concerns that arise when citizens of one state are haled into another state's courts are absent when a federal court summons a foreign citizen before it, and the federal government's unique role in the international arena is one to which no state can lay claim.

Finally, and most importantly, for courts to take any path other than one that recognizes the pervasive and far-flung harm that far-reaching investment frauds - especially those that reach across borders - can cause American investors would be to close one's eyes to reality, to deny the expanding world-wide economy and the increasing international aspects of the investment world today. To reach a different jurisdictional result for financial information afloat in the stream of international commerce than that held in World-Wide Volkswagen may be the only sensible approach for United States courts faced with Enron-like scandals nigh inconceivable a generation ago. As a result, a broader approach to personal jurisdiction under statutes such as the '34 Act may be both inevitable and proper in a circumscribed set of securities actions. If so, questions relating to personal jurisdiction may begin to be taken into account when parties weigh the relative merits of proceeding in state versus federal court, where the reach of the long arm of the law may not always be the same.

Neal Troum is an Associate in Stradley Ronon's Litigation Practice Group. He represents clients in a wide array of practice areas, including products liability, class actions, insurance and surety, appellate practice, contract disputes, personal injury and banking .

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