The Gray Edges of 'Morrison'

Bright line tests invariably prove both overinclusive and underinclusive. By definition, that is the nature of bright-line tests, and the Supreme Court’s decision in Morrison v. National Australia Bank¹ seems no exception. Morrison’s goals were both (1) to reduce legal uncertainty (because the Second Circuit’s prior “conduct” and “effect” tests had proven murky), and (2) to minimize U.S. interference with the regulatory affairs of other countries (in part because the extraterritorial application of Rule 10b-5 could threaten the solvency of foreign corporations that had no more than a legal toe in U.S. waters). In the year after Morrison, a torrent of case law has followed, which this column will survey, but the bottom line is that some uncertainty persists and some comity problems remain.

In overview, federal courts are not resisting, but are extending, Morrison. Even in cases where trading does occur in the United States, some courts are finding the transaction too remote to justify the application of Rule 10b-5. As an application of Morrison, this is dubious, because Morrison sought to preclude U.S. courts from engaging in precisely such multi-factor balancing by instead imposing an easily applied bright-line standard. Still, on the policy level, these decisions may make sense, because some transactions that involve trades in the United States are still exceedingly remote from the United States’ legitimate concerns. Thus, they suggest the need for additional SEC rules limiting when trading, even though it occurs in the United States, should not give rise to a U.S. antifraud action.