Mary Jean Whitsell
In Prime International Trading v. B.P. P.L.C., the Second Circuit used its Securities Exchange Act (“SEA”) jurisprudence to limit private plaintiffs’ ability to bring suit under the Commodities Exchange Act (“CEA”) where the violative conduct occurs abroad. Holding that plaintiffs can only bring suit under the CEA where the alleged transaction and manipulative conduct are domestic will severely limit U.S. plaintiffs’ ability to seek damages, even when they trade entirely on U.S. markets. The high pleading bar imposed by Prime International is especially impactful given that trading commodities and futures contracts are more accessible than ever due to electronic platform-based trading, which allows traders to access U.S. and foreign markets with ease.
But, how has the Second Circuit’s extraterritorial application of the CEA become so restrictive? Much of the relevant law comes from securities regulations cases, so the answer begins with SEA 10(b)’s extraterritorial scope and its application to commodity law.
Morrison v. National Australia Bank Ltd. and the Presumption Against Extraterritoriality
In Morrison v. National Australia Bank Ltd, the Supreme Court replaced the existing tests for whether the SEA applied extraterritorially. Seeking a predictable and simple test,Morrison established a two-step framework to determine whether a statute reached a plaintiff’s claim. The first step in the Morrison test is the presumption against extraterritoriality. Under this step, a statute is presumed to be concerned with domestic conditions, and therefore only applies domestically, unless “the affirmative intention of the Congress [is] clearly expressed to give the statute extraterritorial effect.” Where a statute does not rebut the presumption against extraterritoriality, failing the first step, a plaintiff can seek the “domestic application” of the statute under the second step. To determine whether a plaintiff’s allegations are a permissible “domestic application” of a statute, the Court instructs to see whether the statute’s “focus” targets the claim’s alleged conduct.
The Court then applied this framework to the SEA Section 10(b) finding that the statute did not apply extraterritorially and that 10(b)’s “focus” was transactional for the purposes of a domestic application.
The Ninth and Second Circuits Disagree Whether Domestic Transaction is Sufficient to Satisfy Morrison’s Transactional Test
Although Morrison aimed to clarify the extraterritorial scope of securities regulation, there is a circuit split on what constitutes a domestic application of SEA 10(b) and its accompanying Rule 10b-5. The Ninth and Second Circuits disagree on whether a domestic transaction, such as trading on a domestic exchange or incurring irrevocability in the United States, is sufficient to allege a domestic application of Rule 10b-5. In Parkcentral Global Hub Ltd. v. Porsche Automobile, the Second Circuit found that a domestic transaction is necessary, but not sufficient, to state a claim under Rule 10b-5. To be within 10b-5’s reach, the Second Circuit ruled that the conduct also could not be “so predominantly foreign as to be impermissibly extraterritorial.” The Ninth Circuit, in Stoyas v. Toshiba Corp., rejected the “predominantly foreign” gloss and ruled that a domestic transaction is sufficient to allege a violation of 10b-5.
Furthermore, the Ninth Circuit stated that it would not follow Parkcentral because the decision is contrary to “Section 10(b) and Morrison itself.” First, the court stated that Parkcentral’s predominantly foreign carveout was contrary to the broad language of 10(b): the domestic “purchase or sale of any security registered on a national securities exchange or any securities not so registered.” Moreover, the court critiqued Parkcentral as speculating about Congressional intent and creating an “open-ended, under-defined multifaceted test” – two issues that Morrison explicitly rebuffed. The court reiterated that whether there was a connection between the alleged violative conduct and the purchase or sale of a security was a question of merits, not applicability.
The Second Circuit’s Application of Morrison and Parkcentral to the CEA
Given the similarities between securities and commodities law, the Second Circuit has applied Morrison’s framework to the CEA. Specially, the Second Circuit has applied Morrison’s presumption against extraterritoriality and “transaction test” applied to the CEA Section 22, which grants plaintiffs a private right of action for certain violations of the CEA.
Additionally, the Second Circuit recently applied Parkcentral to CEA Section 22 in Prime International Trading v. BP P.L.C. Here, the Defendants allegedly engaged in artificial trades on the underlying and foreign physical Brent crude market to manipulate domestic physical and futures Brent crude markets, causing the Plaintiffs financial loss. However, Plaintiffs did not claim that Defendants directly engaged in manipulative transactions on domestic markets. The Court summarized the Plaintiffs’ claim as limited to “Defendants’ foreign physical market transaction,… [which] initiated a chain of events that caused ripple effects across global commodities markets.”
The Second Circuit reasoned that the “text and structure of Section 22” and the presumption against extraterritoriality compelled applying Parkcentral to Prime International. The Court emphasized that allowing plaintiffs to bring claims merely based on a foreign transaction is insufficient to rebut the presumption against extraterritoriality and could result in conflicts between U.S. and foreign laws. Applying Parkcentral, the Court found that Plaintiffs’ claims were “impermissibly extraterritorial” because they did not allege any violative domestic conduct.
Lower courts have subsequently read Prime International as requiring violative domestic conduct, in addition to a domestic transaction, to allege a violation of Section 22. For example, in In re Platinum and Palladium Antitrust Litigation, the Southern District of New York stated that Prime International teaches the court to “assess whether Plaintiffs’ CEA claims are predominantly foreign.” Furthermore, where a plaintiff alleges a domestic transaction, Prime International directs the court “to focus to where the allegedly unlawful manipulation occurred.” In Laydon v. Mizuho Bank, Ltd., the Southern District came to a similar result, finding that because the Defendants’ alleged violative conduct was almost entirely foreign, the plaintiffs’ claim was impermissibly extraterritorial.
 See Prime Int’l Trading, Ltd. v. BP P.L.C., 937 F.3d 94 (2d Cir. 2019).
 David E. Kovel & Andrew M. McNeela, The Commodities Exchange Act and the Presumption Against Extraterritoriality: An Examination of Transnational, Platform-Based Electronic Trading Under Second Circuit Precedent, 18 J. Int’l Bus. & L. 147, 147 (2019).
 Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247, 261 (2010).
 Id. at 255 (citation omitted).
 Id. at 266.
 Id. at 265.
 Id. at 266.
 Parkcentral Glob. Hub Ltd. v. Porsche Auto. Holdings SE, 763 F.3d 198, 216 (2d Cir. 2014).
 Stoyas v. Toshiba Corp., 896 F.3d 933, 49–50 (9th Cir. 2018).
 Id. at 950.
 Id. at 951.
 See Loginovskaya v. Batratchenko, 764 F.3d 266 (2d Cir. 2014).
 Prime Int’l Trading, Ltd. v. BP P.L.C., 937 F.3d 94, 100 (2d Cir. 2019).
 Id. at 105.
 Id. at 106.
 Id. at 105–107.
 In re Platinum & Palladium Antitrust Litig., 1:14-cv-9391-GHW, 2020 WL 1503538 at *29 (S.D.N.Y. Mar. 29, 2020).
 Laydon v. Mizuho Bank, Ltd., 12 Civ. 3419 (GBD), 2020 WL 5077186 at *2 (S.D.N.Y. Aug. 27, 2020).