25 August 2014
The US Court of Appeals for the Second Circuit has ruled that the presumption against extraterritoriality applies to private party actions under Section 21(h) of the Securities Exchange Act of 1934 (“Exchange Act”).1 The Second Circuit’s August 14, 2014 decision in Liu v. Siemens AG addressed some of the questions left unanswered in the US Supreme Court’s 2010 decision in Morrison v. National Australia Bank.2
Federal statutes are presumed not to have effect outside of the territorial jurisdiction of the United States absent a clearly expressed affirmative intent by Congress.3 In Morrison, the Supreme Court invoked the presumption against extraterritoriality to hold that civil actions for securities fraud under Section 10(b) of the Exchange Act cannot be based on foreign conduct, but rather must concern “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.”4 However, because Morrison involved an action under Section 10(b), and was decided prior to the passage of the Dodd-Frank Act, the Court did not consider whether or how the presumption against extraterritoriality would apply to private lawsuits brought to enforce the whistleblower anti-retaliation protections of Section 922 of the Dodd-Frank Act (the “Anti-Retaliation Protections”).5
In Liu, the Second Circuit focused on whether the presumption against extraterritoriality extends to actions brought to enforce the Anti-Retaliation Protections.6 The plaintiff, Liu Meng-Lin, a Taiwanese citizen and resident, filed suit claiming that his employment with a Chinese subsidiary of the German company Siemens AG was impermissibly terminated after he internally reported that “Siemens employees were indirectly making improper payments to officials in North Korea and China in connection with the sale of medical equipment in those countries,” in violation of the Foreign Corrupt Practices Act (“FCPA”).7 Notably, Liu did not claim to have reported the misconduct to the US Securities and Exchange Commission (“SEC”) before his termination; nor did he claim that any of the events connected with his termination occurred within the United States or that any persons involved in his termination were located in the United States. The district court dismissed Liu’s suit for failure to state a claim under Rule 12(b)(6).8
Assuming without deciding that Liu’s internal reporting would have qualified him for the Anti-Retaliation Protections, the Second Circuit framed Liu’s burden to survive Siemen’s motion to dismiss as demonstrating “either (1) that the facts alleged in his complaint state a domestic application of the anti-retaliation provision of the Dodd‐Frank Act or (2) that the anti-retaliation provision is intended to apply extraterritorially.”9 The court held that Liu failed to meet either requirement.
More specifically, the Second Circuit concluded, in part, that the facts alleged in Liu’s complaint failed to state a claim for the domestic application of the Anti-Retaliation Protections because there was “essentially no contact with the United States regarding either the wrongdoing or the protected activity.” In reaching that conclusion, the Second Circuit specifically rejected Liu’s argument that Siemen’s listing of a class of stock on the New York Stock Exchange subjected it to the US federal securities laws. The court noted that, under Morrison, “where a plaintiff can point only to the fact that a defendant has listed securities on a US exchange, and the complaint alleges no further meaningful relationship between the harm and those domestically listed securities, the listing of securities alone is the sort of ‘fleeting’ connection that ‘cannot overcome the presumption against extraterritoriality.’”10
The Second Circuit further concluded that nothing in the Dodd-Frank Act, or its legislative history, indicates that “Congress intended the antiretaliation provision to regulate the relationships between foreign employers and their foreign employees working outside the United States.”11 The court accordingly rejected Liu’s argument that Congress’s grant of extraterritorial jurisdiction in Section 929P evidenced its intent to extend extraterritorial jurisdiction to the Anti-Retaliation Protections. The court reasoned that Liu’s statutory construction, which would confer extraterritorial jurisdiction to the entire Dodd-Frank Act, would also violate “the ordinary canons of statutory interpretation” by rendering Section 929P’s explicit grant of extraterritorial jurisdiction redundant.12 Moreover, the court noted that Liu lacked any other basis for jurisdiction under Section 929P, writing that “Liu is not a governmental actor, he has not pled facts of the sort that would confer jurisdiction under § 929P(b), and he cannot argue that the antiretaliation provision qualifies as an antifraud provision” of the Exchange Act.13
Finally, the court rejected Liu’s argument that the SEC’s regulations implementing Dodd-Frank evidence the extraterritorial application of the Anti-Retaliation Protections. Essentially, Liu argued that the SEC regulations governing the granting of monetary awards (bounties) to whistleblowers contemplate the extraterritorial reach of the bounty provision and thereby provide a basis to apply the Anti-Retaliation Protections extraterritorially. The court strongly suggested, but did not conclude, that the SEC regulations are insufficient to overcome the presumption against extraterritoriality. And, even if SEC regulations could extend the authority to grant monetary awards to non-US persons, the court reasoned that “none of the arguments that the bounty provision is meant to have extraterritorial reach provide any support for Liu’s claim that the antiretaliation provision is meant to have extraterritorial reach.”14
Liu’s importance to future whistleblower anti-retaliation cases is uncertain. While its extraterritorial application holding is consistent with the Supreme Court’s decision in Morrison, as well as with other courts that have addressed the same issue, it fails to resolve the lingering ambiguities with respect to whether internal reporting is sufficient to trigger the protections of Section 922 and when reporting of FCPA violations will be found sufficient to trigger the Anti-Retaliation Protections. Liu’s most durable legacy may be to reinforce that post-Morrison courts will vigorously apply the presumption against extraterritoriality in all but the most clearly defined circumstances.
1 Liu v. Siemens AG, No. 13-4385-CV, 2014 WL 3953672, at *1 (2d Cir. Aug. 14, 2014), aff’g, 978 F.Supp.2d 325 (S.D.N.Y. 2013).
2 The Second Circuit also declined to address whether Section 806 of the Sarbanes‐Oxley Act requires or protects disclosures of FCPA violations.
3 Morrison v. National Australia Bank Ltd., 561 U.S. 247, 257-59 (2010).
4 Id. at 267.
5 Pub. L. No. 111-203 § 922, 124 Stat. 1376, 1841-49 (2010) (the “Dodd-Frank Act”) (codified in relevant part at Exch. Act § 21F(h)(1); 15 U.S.C. § 78u‐6(h)(1)).
6 See Asadi v. G.E. Energy (USA), LLC,No. 4:12‐345, 2012 WL 2522599 (S.D. Tex. June 28, 2012), aff'd on other grounds, 720 F.3d 620 (5th Cir. 2013).
7 Liu at *1.
8 Liu v. Siemens AG, 978 F.Supp.2d 325, 326 (S.D.N.Y. 2013), aff’d, No. 13-4385-CV, 2014 WL 3953672 (2d Cir. Aug. 14, 2014).
9 Liu at *3.
10 Liu at *4.
12 Liu at *5.
14 Liu at *7 (emphasis in original).