A New Justification
Note from the Digital Editor: In order to highlight the high-level of research and scholarship from the authors who have published in the William & Mary Policy Review’s peer-reviewed print journal, we have reproduced the abstracts from Volume 3, Issue 2 along with a link to an electronic copy of the full form of the piece.
In Morrison v. National Australia Bank Ltd., the U.S. Supreme Court reaffirmed the presumption against extraterritoriality in the context of federal securities antifraud regulation. To be sure, the Court made it clear that unless Congress gives clear indication to the contrary, a rather narrow territorial criterion, such as the place of transaction, will limit the scope of unilateral American regulation of not only securities, but also various other economic activities (e.g., intra-corporate maneuvers, competition in product markets, protection of intellectual property). In our “global village,” however, an increasing number of economic activities obviously transcend territorial borders. Thus, the concept of territoriality and any attempt to employ it narrowly seem somewhat archaic. Nonetheless, can the Supreme Court’s approach be justified? This question becomes even more acute if one considers that the Court and Congress are already in the midst of developing alternative criteria—an “effects test” and a “conduct test”—to decide the extraterritorial application of American economic regulation norms. In fact, the Dodd-Frank Act applied the effects test in the context of administrative securities regulation, and the SEC was instructed to consider applying the effects test to the private ordering of securities regulation.
Against this background, this article offers a new justification for the territorial criterion that can explain the anomalies associated with a narrow version of territoriality, justify the Supreme Court’s approach in Morrison, and reflect upon other contexts of economic regulation and future statutory reforms. My main argument is that one needs to appreciate the importance of narrow territoriality by examining the environment in which the extraterritorial scope of economic regulation is designed and later executed. Most importantly, I argue that an economic regulatory norm is formulated under conditions of information asymmetry. Consequently, each jurisdiction does not have sufficient information regarding the manner in which jurisdictions refrain from unjustifiably invading others’ sphere of regulation. Thus, rather than merely declaring their willingness to cooperate—defined as the willingness to tolerate foreign regulation in the cases that mostly affect the foreign jurisdiction—jurisdictions need to signal this willingness to one another. Adopting an arbitrary criterion such as narrow territoriality to limit the scope of an economic regulation serves such a signaling purpose because it is both observable and costly.
Find the full version of this article in PDF form here.
Yaad Rotem is a Visiting Scholar at Center for the Study of Law & Society, University of California, Berkeley, School of Law