Prime Intl. Trading Ltd.. v. BP P.L.C., No. 17-2233 (2d Cir. Aug. 29, 2019) [click for opinion]
Plaintiffs—who are individuals and entities that traded futures and derivatives contracts for North Sea oil (or "Brent crude") on the Intercontinental Exchange Futures Europe and the New York Mercantile Exchange—brought fraud claims (amongst others) under Sections 6(c)(1), 9(a)(2), and 22 of the Commodity Exchange Act ("CEA") against Defendants—a diverse group of entities that produce, refine, and/or distribute Brent crude, purchase or sell Brent crude on the physical market, and trade Brent-crude-based futures contracts on global derivatives markets. Plaintiffs alleged that Defendants executed fraudulent bids, offers, and transactions in the underlying physical Brent crude market in Europe which then caused a ripple effect that distorted Brent Futures prices and caused Plaintiffs economic loss. Specifically, the alleged manipulative trading activity in Europe affected Brent crude prices, a foreign commodity, which, in turn, affected a foreign benchmark, the Dated Brent Assessment, which was then disseminated by a foreign price-reporting agency, and the assessment was used to price futures contracts traded on exchanges around the world. Plaintiffs did not, however, assert that any manipulative conduct or statements occurred in the United States. This district court had dismissed all claims against all Defendants, but the Second Circuit only addressed dismissal of the CEA claims in this appeal.
The Second Circuit evaluated whether the relevant CEA sections permitted suit against Defendants for alleged manipulative conduct that transpired in Europe either: (i) because the relevant CEA sections applied extraterritorially or (ii) because the domestic activity pleaded implicated the focus of those CEA sections. The court ultimately concluded that the CEA sections did not permit Plaintiffs to proceed on their claims and affirmed the district court's judgment.
In particular, the court reasoned that it must interpret the CEA in light of the presumption against extraterritoriality—a canon of statutory interpretation that dictates federal laws must be construed to only have domestic application, absent a clearly expressed congressional intent to the contrary. If the text of the statute does not include a clear statement of extraterritorial effect, then it will not apply abroad. In interpreting the language of Sections 6(c)(1), 9(a)(2), and 22 of the CEA, the court held that none of the text contained a clear indication of extraterritoriality. This conclusion was further reinforced by the fact that Section 2(i) of the same statute did include specific language enumerating when it could apply extraterritorially. The court thus concluded that Congress knew how to extend a statute extraterritorially if it wanted to and so did not do so here.
Having held that the relevant sections of the CEA did not apply extraterritorially, the Second Circuit considered whether Plaintiffs had properly pleaded domestic application of the CEA, i.e., whether the domestic activity involved was the focus of congressional concern in enacting those CEA sections. The court reasoned that it had to analyze each section individually and discern whether Plaintiffs' allegations were the focus of concern for that provision. The Second Circuit did so by looking to the conduct that each section sought to regulate as well as the parties and interests that those sections sought to protect or vindicate.
The court observed that Section 22 of the CEA, which provides a private right of action, was focused on domestic transactions. The court assumed, without deciding, that Plaintiffs met the domestic transaction test. However, since Section 22 did not create any freestanding, substantive obligation, a domestic transaction was necessary, but not sufficient. Extending Parkcentral Global Hub v. Porsche to the CEA, the court concluded that a plaintiff must allege both a domestic transaction and some domestic conduct that violated one of the CEA's substantive provisions. This standard for Section 22 was appropriate because: (i) to conclude otherwise would permit plaintiffs to make an end run around the presumption against extraterritoriality by merely pleading a domestic transaction; (ii) foreign conduct is generally the domain of foreign law; and (iii) there could be potential unintended foreign policy consequences that were not intended by the political branches.
Applying this standard here, the Second Circuit concluded that Plaintiffs' claims were so predominately foreign that they were impermissibly extraterritorial. Nearly every link in Plaintiffs' chain of wrongdoing was entirely foreign. Accordingly, the court held that Plaintiffs had failed to plead a proper domestic application of Section 22 and, thus, the CEA claims were properly dismissed.
The court further reasoned that, although Plaintiffs' suit needed to satisfy the threshold requirement of Section 22 before reaching the merits of their Section 6(c)(1) and 9(a)(2) fraud claims, Plaintiffs had similarly failed to plead a proper domestic application for either of those sections. In particular, Section 6(c)(1) centered on manipulation in commodities markets, but all of the relevant conduct alleged occurred abroad. Similarly, Section 9(a)(2) focused on preventing manipulation of the price of any commodity and here all of the relevant conduct allegedly affecting the price occurred abroad. Accordingly, the Second Circuit concluded that Plaintiffs had failed to plead domestic application of any of the relevant CEA sections and affirmed the lower court's dismissal.