Antitrust Law Daily Wrap Up, ADVERTISING—S.D. N.Y.: Lanham Act did not cover credit-linked note sales in Singapore, (Oct 28, 2013)

By John W. Arden, J.D., L.LM.

Claims that Morgan Stanley induced Hong Leong Finance Limited to sell credit-linked notes (CLNs) to Singaporean investors by falsely advertising the conservative nature of the investment, in violation of the Lanham Act, failed on the ground that the Lanham Act did not apply to Morgan Stanley’s alleged activities in Singapore, the federal district court in New York City ruled (Hong Leong Finance Limited v. Pinnacle Performance Limited, October 23, 2013, Furman, J.). Hong Leong Finance Limited failed to establish that Morgan Stanley made any representations that were likely to deceive or confuse purchasers of the notes in Singapore.

Hong Leong Finance Limited (HLF) alleged that, between August 2006 and December 2007, Morgan Stanley issued credit-linked notes, which function by shifting the credit risk associated with certain Reference Entities from a “protection buyer” (typically the bank arranging the CLN) to a “protection seller” (the CLN investors).

Although the underlying assets in CLNs are typically composed of safe and liquid income-generating assets, Morgan Stanley selected “very risky” assets to serve this function, according to HLF. In fact, the finance company alleged that Morgan Stanley selected as underlying assets single-tranche synthetic CDOs that were designed to fail because Morgan Stanley, through its affiliate MS Capital, had taken a “short” position on these assets—meaning that they had “bet against them,” the court explained.

Morgan Stanley did not sell these notes directly to Singaporean investors, but entered into a distribution agreement requiring that HLF “use its reasonable efforts to procure subscribers in Singapore” and to collect the investors’ payments. The distribution agreement also contained an indemnification provision that obligated Morgan Stanley to indemnify HLF for certain losses relating to the notes.

HLF contended that Morgan Stanley persuaded it to sell the notes to customers by emphasizing that they were “conservative” and “low-risk products” suitable for middle-class and working-class Singaporeans and small and medium-sized enterprises. After HLF sold its customers $72.4 million worth of CLNs, the notes failed. The Monetary Authority of Singapore intervened, instructing the note purchasers to file claims directly with HLF. The Monetary Authority appointed an independent party to oversee HLF’s complaints resolution process and to ensure that HLF made payments to the investors, which totaled more than $32 million as of the filing of the complaint.

On August 1, 2012, HLF brought suit against Morgan Stanley and related companies in the federal district court in New York City, premised on diversity grounds. The defendants asserted that the diversity statute did not provide a basis for jurisdiction in this case. HLF subsequently amended the complaint to add false advertising claims under the Lanham Act to its common law claims for fraud, fraudulent inducement to contract, negligent misrepresentation, breach of contract, breach of the implied covenant of good faith and fair dealing, and equitable subrogation. Morgan Stanley moved to dismiss the complaint for lack of subject matter jurisdiction and failure to state a claim.

Subject matter jurisdiction. Jurisdiction may not be based on diversity when a lawsuit is brought by a citizen of a foreign state (HLF) against citizens of the U.S. (Morgan Stanley, Morgan Stanley Capital Services LLC, and Morgan Stanley & Co.) and citizens of foreign states (Pinnacle Performance Limited, Morgan Stanley Asia Pte., and Morgan Stanley & Co. International plc). However, HLF alleged a federal claim under the Lanham Act.

Although simply raising a federal issue in a complaint will not automatically confer federal question jurisdiction, the inadequacy of a federal claim is ground for dismissal for lack of subject-matter jurisdiction “only when the claim is so insubstantial, implausible, foreclosed by prior decisions of the Supreme Court, or otherwise completely devoid of merit as not to involve a federal controversy.” The court was not prepared to say that any of those applied here.

Lanham Act claim. HLF’s Lanham Act claim was subject to dismissal because the amended complaint failed to allege facts that would support application of the statute extraterritorially to the conduct at issue in this case. It is well established that the Lanham Act may reach allegedly infringing conduct that occurs outside the United States when necessary to prevent harm to commerce in the United States.

The Second Circuit has held that there are three “Vanity Fair” factors that are relevant to whether the Lanham Act may be applied extraterritorially: (1) whether the defendant is a U.S. citizen, (2) whether there is a conflict between the defendant’s trademark rights under foreign law and the plaintiff’s trademark rights under domestic law, and (3) whether the defendant’s conduct has substantial effect on United States commerce.

In this case, HLF failed to allege facts that could plausibly satisfy the third factor, defeating its Lanham Act claims. HLF’s argument why the third factor was met consisted entirely of the following conclusory statement in its memorandum of law: “Morgan Stanley’s scheme was executed in large part from New York.” HLF failed to allege domestic activity by Morgan Stanley sufficiently essential to the allegedly infringing activity abroad. At most, it alleged that Morgan Stanley issued and structured its notes from its headquarters in and around New York City.

“But the gravamen of HLF’s Lanham Act claim is false advertising: that is, it ‘rises and falls on whether Morgan Stanley made statements that were ‘likely to decieve’ or ‘likely to confuse investors …’ not on any statements Morgan Stanley made to HLF.” And HLF made no allegation that Morgan Stanley directed any false advertisements from the United States to the Singaporean investors, the court held. In fact, HLF made no allegation that Morgan Stanley had any contact with the investors.

There was no nexus between Morgan Stanley’s activities in the United States and the alleged activities in Singapore. Since the Lanham Act did not extend to Morgan Staley’s alleged conduct, the motion to dismiss the Lanham Act claims was granted.

State law claims. Having dismissed HLF’s sole federal claim, the district court refused to retain jurisdiction over the state law claims.

The case is No. 12 Civ. 6010 (JMF).

Attorneys: David S. Stellings (Lieff Cabraser Heimann & Bernstein, LLP) for Hong Leong Finance Limited. Bruce D. Angiolillo (Simpson Thacher & Bartlett LLP) for Morgan Stanley Asia PTE, Morgan Stanley & Co. International PLC, Morgan Stanley & Co. LLC, and Morgan Stanley Capital Services LLC.

Companies: Hong Leong Finance Limited; Morgan Stanley Asia Pte.; Morgan Stanley & Co. International plc; Morgan Stanley & Co. LLC; Morgan Stanley Capital Services LLC

Cases: Advertising NewYorkNews