The U.S. Court of Appeals for the Second Circuit upheld a lower court's dismissal of a private class-action lawsuit brought under the CEA. The class alleged that defendant oil companies manipulated the foreign benchmark for the price of Brent crude oil.

In upholding the dismissal, the Second Circuit held that the CEA did not permit the suit against the defendants for alleged conduct in Europe. The Court rejected the argument that the non-U.S. trading at issue was under the jurisdiction of U.S. courts because it had an indirect effect on pricing of U.S. futures contracts. Characterizing this argument as "resembl[ing] a falling row of dominoes commencing in the North Sea," the Court held that upholding such an "attenuated" theory would constitute an impermissibly extraterritorial application of the CEA that would allow the CEA to "rule the world."

Commentary

What is notable here is the extent to which the Court of Appeals upheld the jurisdictional arguments offered in an industry amicus brief filed by the U.S. Chamber of Commerce, SIFMA, ISDA, and FIA, which opposed arguments offered not only by the plaintiff traders but also those by the CFTC. Indeed, the Court adopted much of the language in the amicus brief.

It is also noteworthy that the Court rejected what it characterized as an "attenuated 'ripple effects'" argument offered by the defendants in which they maintained that activity occurring outside U.S. is subject to CFTC jurisdiction because of its indirect "effects" on U.S. markets. This is not the first time that such a causal chain argument has been rejected by the courts. See Hunter v. FERC (rejecting FERC's justification for asserting jurisdiction over transactions occurring on "a CFTC-regulated exchange" because of its effects on FERC-regulated markets). The irony is that while the CFTC in Hunter resisted FERC's use of this argument to assert authority over CFTC-regulated trading activity, here the CFTC supported a similar argument to extend its jurisdiction abroad.

The outcome in this type of matter may be different the next time around, however, in light of Dodd-Frank's grant of limited extraterritorial authority for swap activity occurring outside the U.S. that has "a direct and significant connection with activities in, or effect on, commerce of the United States," a provision that was not at play here. See CEA Section 2(i).

Primary Sources

  1. U.S. Court of Appeals, Second Circuit: Amici Brief
  2. U.S. Court of Appeals, Second Circuit Decision: Prime International Trading, et al. v. BP P.L.C., et al.

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