First published in Antitrust News & Notes, October 2011
The Foreign Trade Antitrust Improvements Act (FTAIA), enacted in 1982, was meant to provide clarification on the applicability of the Sherman Act to foreign commerce. The FTAIA was also supposed to protect American exporters from being unfairly subjected to trade restrictions not faced by their international competitors. Whether the FTAIA has been successful in protecting American exporters is debatable, but as for providing clarity on the application of the Sherman Act to foreign commerce, few would argue that the statute comes close. In fact, the U.S. Court of Appeals for the Third Circuit has gone so far as to describe the law as using "rather convoluted language" and being "inelegantly phrased."1 As such, companies must rely on the courts to provide the clarity so desperately needed in interpreting and understanding how the FTAIA may reach their foreign conduct. Two recent decisions in the Third and Seventh Circuits help delineate the scope and applicability of the FTAIA.
The FTAIA provides that the Sherman Act: shall not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations unless – (1) such conduct has a direct, substantial, and reasonably foreseeable effect – (A) on trade or commerce which is not trade or commerce with foreign nations, or on import trade or import commerce with foreign nations; or (B) on export trade or export commerce with foreign nations, of a person engaged in such trade or commerce in the United States; and (2) such effect gives rise to a claim under [the Sherman Act].2
However inelegantly phrased, courts have recognized that the FTAIA provides two important exceptions to the general rule that the Sherman Act does not apply to foreign commerce. The FTAIA makes the Sherman Act applicable (1) to foreign anticompetitive conduct involving U.S. import trade or import commerce, or the "import commerce exception," and (2) foreign anticompetitive conduct that has a direct, substantial, and reasonably foreseeable effect on U.S. domestic or import trade or commerce, or the "direct effects exception."
Since Congress passed the FTAIA in 1982, there has been uncertainty as to whether it was intended to create a jurisdictional bar to be applied by courts at the outset of a matter or a substantive merits limitation. Courts have also endeavored to clarify the meaning and applicability of the import commerce and direct effects exceptions. The Third Circuit in Animal Science Products, Inc. v. China Minemtal Corp.,3 and the Seventh Circuit, in Minn-Chem, Inc. v. Agrium Inc.,4 offer significant guidance on whether the FTAIA is indeed jurisdictional, and the application of the two exceptions.
The FTAIA Provides a Substantive Element of a Sherman Act Claim, Not a Jurisdictional Limit
Precedent in both circuits provided that the FTAIA imposed a jurisdictional limit, but the Third Circuit, in the face of recent U.S. Supreme Court decisions, reversed its prior precedent and the Seventh Circuit clearly indicated that it would be inclined to do the same if faced with the issue. Both courts relied on the U.S. Supreme Court's decisions in Arbaugh v. Y&H Corp.5 and Morrison v. National Australia Bank Ltd.6 for the bright-line rule that courts should apply a jurisdictional test to a statute only when Congress clearly, explicitly, and specifically articulates one.
In Animal Science Products, the Third Circuit noted that Congress did not specifically articulate a jurisdictional limit in the FTAIA and in fact, "the statutory text is wholly silent in regard to the jurisdiction of the federal courts."7 As such, the Third Circuit reversed the trial court decision which, following circuit precedent, held that the FTAIA was jurisdictional.
The Seventh Circuit, though it did not actually decide whether the FTAIA was jurisdictional, did "note the issue and reserve it for another day." In United Phosphorous, Ltd. v. Angus Chemical Co., an en banc panel of the Seventh Circuit held that the FTAIA established a jurisdictional bar to claims for foreign anticompetitive behavior under the Sherman Act. In Minn-Chem, the Seventh Circuit recognized that the Supreme Court's approach in Arbaugh and Morrison more closely paralleled the dissent's opinion in United Phosphorous. The court did not go as far as to reverse United Phosphorous, because it found that the suit was barred by the FTAIA for failing to state a claim upon which relief could be granted.
The Third Circuit decision may have a significant impact on how FTAIA cases are litigated in the future. If the FTAIA does not impose a jurisdictional bar, plaintiffs will no longer have the burden of establishing jurisdiction. To successfully defend against FTAIA claims, defendants now will have the initial burden of showing that the claims are insufficient on their face in a motion to dismiss. Importantly, this means that courts will accept all allegations in a complaint as true and not examine the credibility of those allegations.
The Import Commerce Exception Requires Conduct Directly Targeting at Import Markets
Both Animal Science and Minn-Chem provide guidance as to the scope and application of the import commerce exception. Both circuits noted that the exception requires strict construction in order to give meaning to the direct effects exception. The Seventh Circuit held that simply being an importer who engaged in anticompetitive behavior abroad was insufficient under the import commerce exception. The Third Circuit held that, while being an importer may be relevant to the import commerce exception, it was not a necessary prerequisite. Both courts agree that the relevant inquiry under the import commerce exception is whether the alleged anticompetitive behavior was directed or targeted at import commerce.
In Minn-Chem, the lower court held that the import commerce exception applied because plaintiffs alleged that defendants were actual importers and were generally accused of conspiring to fix prices internationally. The Seventh Circuit found this interpretation to be in error and reversed the lower court's decision. Specifically, the court noted that the district court's interpretation would render the direct effects exception meaningless if any importer of goods who engaged in anticompetitive conduct outside of the U.S. would be subject to the Sherman Act, regardless of the impact on the U.S. market. The court held that for a claim to be sufficient under the import commerce exception the conduct at issue must actually and directly involve the U.S. market. It is not sufficient for the defendants to be merely engaged in the import market.
Because the plaintiffs in Minn-Chem failed to allege any specific conduct aimed or targeted at the U.S. import market, but rather generally alleged that the defendants engaged in anticompetitive behavior in Brazil, China, and India, the Seventh Circuit found that the complaint was insufficient as to the import commerce exception. The court noted that the plaintiffs alleged that the defendants conspired to coordinate prices abroad in an effort to fix and stabilize U.S. prices, but that the complaint did not contain any specific factual allegations as to how defendants achieved this. Because this allegation was nothing more than a mere recitation of a necessary legal element without any factual substantiation, the court found it insufficient.
In Animal Science, the district court held that for the import commerce exception to be applicable, defendants actually had to function as importers of goods. The Third Circuit, however, reversed, holding that while being an importer "may satisfy the [import commerce exception] . . . it is not a necessary prerequisite." The anticompetitive behavior at issue need only be directed at import commerce.
Both decisions make clear that for the import commerce exception to apply, the conduct at issue must actually target import commerce. Whether the defendant is actually an importer, though relevant to the analysis, is not dispositive either way.
The Direct Effects Exception is an Objective Test Requiring Immediate Domestic Consequences of Foreign Anticompetitive Behavior
Both Animal Science and Minn-Chem provide important direction on the meaning and application of the direct effects exception as well. In Animal Science, the Third Circuit made clear that the FTAIA's direct effects exception imposes an objective standard. In other words, for foreign anticompetitive behavior to be subject to the direct effects exception, the conduct must have had direct and substantial effects in the domestic market that would have been foreseeable to an objectively reasonable person. The exception does not require actual subjective intent on the part of the defendant to affect U.S. import commerce.
Where Animal Science helped clarify the requisite standard to be applied, it did little to elaborate on what constitutes a direct, substantial, and reasonably foreseeable effect; a question that Minn-Chem endeavored to answer. In Minn-Chem, the Seventh Circuit, borrowing from a 2004 Ninth Circuit decision,8 found that, for an effect to be direct, it must follow as an immediate consequence of the defendant's activity. As such, if an effect depends on "uncertain intervening developments" it cannot be direct and is insufficient under the direct effects exception.
The complaint in Minn-Chem alleged significant anticompetitive behavior abroad, but failed to tie that behavior into a specific effect in the U.S. that resulted from it. Specifically, the plaintiffs alleged anticompetitive behavior such as price fixing and parallel output production in China, India, and Brazil. The plaintiffs further alleged that products are first sold in those three markets, and the prices established there are used as a benchmark for U.S. prices. The Seventh Circuit, however, found that the plaintiffs' allegations were not sufficiently detailed as to how prices in foreign markets directly and substantially affected U.S. prices. The connection between the foreign conduct and the U.S. market cannot be speculative and indirect. Simply alleging a global market where anticompetitive behavior abroad will eventually have a ripple effect on the U.S. market is not enough.
Conclusion
The Animal Science and Minn-Chem decisions provide clarification and guidance on the FTAIA. First, it is clear that in light of recent Supreme Court precedent, courts that have the opportunity to review whether the FTAIA poses a jurisdictional bar likely will hold that FTAIA is not jurisdictional. Second, for the import commerce exception to apply, the anticompetitive behavior at issue must be directly targeted at U.S. imports. Simply being an importer, though relevant, is not dispositive. Third, the direct effects exception is an objective standard that requires an actual and direct effect on U.S. commerce that cannot be predicated on intervening circumstances.
Footnotes
1 Turicentro, S.A. v. Am. Airlines Inc., 303 F. 3d 293, 300 (3d Cir. 2002).
2 15 U.S.C. § 6A.
3 2011 U.S. App. LEXIS 17046 (3d Cir. 2011).
4 2011 U.S. App LEXIS 19433 (7th Cir. 2011).
5 546 U.S. 500 (2006) (holding that the numerical qualification contained in Title VII's definition of employer does create a subject-matter jurisdiction test).
6 130 S. Ct. 2869 (2010) (finding that the extraterritorial reach of § 10(b) of the Securities and Exchange Act of 1934 did not create a subject-matter jurisdiction test but rather was a merits question).
7 Animal Science Products, Inc., 2011 U.S. App. LEXIS at 15.
8 United States v. LSL Biotechs., 379 F.3d 672, 680 (9th Cir. 2004) (adopting the Supreme Court's interpretation of direct in the Foreign Sovereign Immunities Act).
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