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The Supreme Court recently gave a significant victory to those seeking to prevent plaintiffs' lawyers from taking advantage of our overly generous civil justice system. In Morrison v. National Australia Bank Ltd., the Court held that plaintiffs who purchased securities traded on foreign exchanges could not bring an action for securities fraud in U.S. courts. The case involved a lawsuit brought against an Australian company for alleged misstatements made to foreign investors in connection with securities traded on the Australian securities market. The Court held that Congress declined to provide a venue for foreign plaintiffs seeking to pursue such fraud claims in U.S. courts.

Prior to Morrison, some courts had interpreted the law much differently, holding that such cases may proceed where a sufficient portion of the alleged misconduct occurred in the United States or where the foreign activities had sufficient "effects" on U.S. investors and securities markets. As Justice Scalia noted in his majority opinion, this result was contrary to the plain language of the securities laws and the strong presumption that Congress intended laws to apply solely within the boundaries of the United States. Nonetheless, foreign plaintiffs were lining up to bring such suits, leading some to fear that the United States had "become the Shangri-Law of class-action litigation for lawyers representing those allegedly cheated in foreign securities markets."

The Court's decision in Morrison cut off this potential expansion of the securities laws to reach foreign disputes--a ruling that is likely to have a significantly positive effect. With the recent economic downturn and accompanying drop in stock prices, the plaintiffs' bar is lining up to file new lawsuits accusing companies of fraud. The last thing the judicial system needs is a wave of additional litigation over foreign securities clogging the U.S. courts.

Moreover, as Justice Scalia noted, each country has its own standards for defining what constitutes securities fraud. Allowing disputes over foreign securities to be brought in U.S. courts would usurp other countries' authority to determine their own laws and upset settled expectations of those selling securities in foreign markets. A "race to the bottom" would ensue, with foreign plaintiffs rushing to U.S. courts that they believed might employ comparatively lax standards and offer potentially greater awards.

While the result in Morrison is a welcome one, it raises a more fundamental question: Why are foreign plaintiffs increasingly attempting to resolve their disputes in U.S. courts? Even a cursory analysis provides several potential answers. Class action practice in the United States often makes it easier for plaintiffs to join claims in a single suit. By bundling claims together, plaintiffs can put additional pressure on defendants to settle regardless of the merits. The United States also stands out in allowing contingent fees under which plaintiffs' lawyers may take a "piece of the action" in the form of a percentage of any judgment if the plaintiffs win. This provides a powerful incentive to bring new cases and an effective funding mechanism for litigation. Finally, the vagaries of U.S. juries often provide the potential for windfall verdicts. Given these risks, companies often find that it is safer to simply settle cases, rather than going to trial. In sum, U.S. law often facilities litigation--whether meritorious or not.

Cases such as Morrison should prompt a thorough review of our civil justice system and provide an impetus for reform. In the absence of such reform, the United States will increasingly become a magnet for foreign lawsuits--of all kinds. This is a result that our country can ill afford at this time.

Douglas Smith is an adjunct scholar at AEI.

Photo credit: iStockphoto/Stefan Klein