NY high court warning: state laws don’t apply to overseas conduct

March 29, 2012

The New York Court of Appeals ruled Tuesday that a German company called Global Reinsurance cannot bring antitrust claims under New York state’s “little Sherman Act” against Equitas, the reinsurer created in 1996 to cap the liability of Lloyd’s of London syndicates. Happily, to understand the high court’s 22-page opinion, we don’t have to get into its analysis of the global market for retrocessionary reinsurance. We don’t even have to consider Chief Judge Jonathan Lippman‘s discussion of whether Equitas had the power to effect worldwide anticompetitive injury. We need only consider what the opinion called “an immovable obstacle” to Global’s case: New York’s antitrust law, the Donnelly Act, “cannot be understood to extend to the foreign conspiracy (Global) purports to describe.”

To reach that conclusion, the Court of Appeals looked to the Sherman Act, the federal statute on which the state’s Donnelly Act is based. In particular, the court considered the Foreign Trade Antitrust Improvements Act, which says that U.S. antitrust laws do not apply to conduct that took place outside of the United States. (I’ve previously written about the FTAIA’s fascinating implications for trade in the global marketplace.) The only exception to the FTAIA’s bar, Lippman’s opinion said, is when an antitrust plaintiff can show that the alleged conduct had a direct and intended effect on U.S. commerce. Global couldn’t do that, the Chief Judge said:

The London conspiracy here alleged was, according to the complaint, worldwide in its orientation; there is nothing in the pleadings to justify an inference that it targeted United States commerce specially… It is not necessary to know precisely the extent of the Donnelly Act’s extra-territorial reach to understand that it cannot reach foreign conduct deliberately placed by Congress beyond the Sherman Act’s jurisdiction.

That’s great news for Equitas, its lawyers at Simpson, Thacher & Bartlett, and any other defendant facing New York state claims that it engaged in an international antitrust conspiracy. I suspect, however, that the state high court’s ruling will have implications beyond this rather small group. The reason? Morrison v. National Australia Bank.

The U.S. Supreme Court’s 2010 ruling in Morrison, as you surely recall unless you only started reading my blog today, held that federal laws should not be presumed to have extraterritorial application unless Congress so specified. One of the ways plaintiffs have responded to Morrison rebuffs in federal court is by filing suit in state court, asserting state-law causes of action as alternatives to parallel federal-court claims. (See here and here for examples.)

That would seem to be similar to Global Reinsurance’s approach in the Equitas case. According to Equitas counsel Kevin Arquit of Simpson, Global never brought a federal antitrust suit against Equitas. Presumably, that’s because Global’s lawyers at Cahill Gordon & Reindel knew they’d be bounced out of federal court under the FTAIA. (Cahill’s Edward Krugman declined to comment.) Instead, Global filed in state court, claiming that Equitas’s overseas conduct violated New York state’s laws, just like plaintiffs who’ve turned to state court to salvage claims Morrison excluded from federal court.

Defendants in those cases should read the Equitas ruling carefully. This opinion isn’t just about antitrust law and the Foreign Trade amendment. Start with the high court’s note that “the established presumption is, of course, against the extra-territorial operation of New York law.” That’s not great for post-Morrison plaintiffs. Nor is the court’s statement that its decision is not based solely on the Sherman Act limits imposed by the FTAIA. For a state-court action based on extraterritorial conduct to proceed, Lippman wrote:

there would, we think, have to be a very close nexus between the conspiracy and injury to competition in this state… [Injury] 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.

Simpson partner Arquit agreed that the Court of Appeals opinion isn’t limited to the specifics of the Equitas case. “At the end of the day,” he told me, “the court is saying, ‘We’re not going to have state laws apply to this conduct that’s international in nature.'”

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