My former classmate, the Honorable Jesse Furman, got this Lanham Act extraterritoriality case.
Plaintiff HLF sued Morgan Stanley and certain affiliates related to credit-linked notes issued by Morgan Stanley. Morgan Stanley entered into a distribution agreement with HLF, and HLF then sold the notes to Singaporean investors. Credit-linked notes shift credit risk associated with the “reference entities” from a “protection buyer” (the bank arranging the notes) to a “protection seller” (the note investors), which uses a special purpose vehicle to stand in the middle and engage in a credit default swap. The principal received from the investors in the notes is used to buy highly-rated securities as collateral in the event that reference entities default. Investors get interest in the form of credit protection payments from the sponsoring bank and any interest generated by the underlying assets. The underlying assets are typically safe and liquid, but HLF alleged that Morgan Stanley selected very risky assets here—single-tranche synthetic CDOs (in other words, clusterbombs). They weren’t just risky; they were allegedly designed to fail, because Morgan Stanley took a short position on those very same assets.
HLF alleged that Morgan Stanley persuaded HLF to sell the notes to its customers by emphasizing that they were “conservative” and “low-risk products” suitable for HLF’s customers: middleclass and working-class Singaporeans, and small—and medium-sized enterprises. HLF eventually sold its customers $72.4 million worth of notes. When the notes failed, Singapore’s de facto central bank stepped in and mandated that HLF pay its investors over $32 million.
The Lanham Act claim, the sole basis of federal jurisdiction, was dismissed because it failed to allege facts supporting application of the statute extraterritorially. The Lanham Act covers conduct outside the US when necessary to prevent harm to commerce in the US. The Second Circuit looks at three factors: “(i) whether the defendant is a United States citizen; (ii) whether there exists a conflict between the defendant’s trademark rights under foreign law and the plaintiff’s trademark rights under domestic law; and (iii) whether the defendant’s conduct has a substantial effect on United States commerce.” The first two factors are significant, but the third is “critical and often dispositive.”
Here, HLF failed to allege facts plausibly satisfying the third factor. There was no alleged consumer confusion or harm to HLF’s goodwill in the US, because HLF doesn’t exist in the US—indeed, it alleged that it had “no expertise in foreign markets”—and the customers Morgan Stanley screwed were middle-class and working-class Singaporeans. HLF argued that Morgan Stanley’s scheme was executed largely in New York, but mere preparation of a scheme within US borders wasn’t enough.
In any event, HLF failed to allege domestic activity “sufficiently essential” to the allegedly unlawful activity abroad. Morgan Stanley allegedly issued and structured the notes in and around NYC. But the gravamen of the complaint was false advertising—whether Morgan Stanley made statements that were likely to deceive or confuse investors, not statements made to HLF. And HLF didn’t allege that Morgan Stanley directed any false ads from the US to the Singaporean investors; there wasn’t even any allegation of contact with the investors, as opposed to contact with HLF. There was therefore no nexus between US activities and the allegedly unlawful activities abroad.