RICHARD W. BECKLER AND MATTHEW H. KIRTLAND SUMMARY I. INTRODUCTION... 12

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1 Extraterritorial Application of U.S. Antitrust Law: What Is a Direct, Substantial, and Reasonably Foreseeable Effect Under the Foreign Trade Antitrust Improvements Act? RICHARD W. BECKLER AND MATTHEW H. KIRTLAND SUMMARY I. INTRODUCTION II. STATUTORY BACKGROUND A. Sherman Act B. Foreign Trade Antitrust Improvements Act C. The FTAIA Does Not Apply to Import Commerce Hartford Fire Test III. DISCUSSION A. The Definition of a Direct, Substantial, and Reasonably Foreseeable Effect is Uncertain B. Agency Interpretation of Direct, Substantial, and Reasonably Foreseeable Effect is a Useful Starting Point FTAIA Subsection (1)(A) Domestic or Non-Direct Import Commerce FTAIA Subsection (1)(B) U.S. Export Commerce C. Judicial Interpretation of Direct, Substantial, and Reasonably Foreseeable Effect What is a Substantial Effect? Individual Injury Is Insufficient What is a Direct Effect? U.S. Ownership of a Company, by Itself, Does Not Create a Direct, Substantial, and Reasonably Foreseeable Effect Location of Negotiations or Signing the Agreement, by Itself, Does Not Create a Direct, Substantial, and Reasonably Foreseeable Effect The Effect Must Be to a U.S. Market Either Domestic, Import, or Export Foreign Plaintiffs Can Establish Subject Matter Jurisdiction There Must Be a Causal Connection Between the Plaintiff s Injury and the Direct, Substantial, and Reasonably Foreseeable Effect IV. CONCLUSION Richard Beckler is a senior partner and head of the litigation group in the Washington, D.C. office of Fulbright & Jaworski L.L.P. He has represented a wide array of corporate and individual clients in cases involving such matters as criminal and civil antitrust, oil and gas pricing schemes, securities fraud, RICO, banking fraud, government procurement fraud, the False Claims Act, and the Foreign Corrupt Practices Act. He was assisted in the preparation of this article by Matthew Kirtland, a senior associate in Fulbright s Washington office litigation group who focuses his practice on complex civil litigation and white collar civil and criminal defense. 11

2 12 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 38:11 I. INTRODUCTION Application of U.S. antitrust law continues to expand, for better or worse, with the expansion of international commerce. The United States Department of Justice (DOJ) and the Federal Trade Commission (FTC) who are charged with the mandate of ensuring open and free markets, protecting consumers, and preventing conduct that impedes competition possess powerful enforcement powers, both criminal and civil, under the Sherman Act 1 and other antitrust statutes. In recent years, the DOJ has successfully brought criminal and civil actions under the Sherman Act against foreign and U.S. corporations, and their individual directors and officers, for anticompetitive conduct that occurred outside the United States. In this environment, it is crucial to understand the extraterritorial scope and application of the Sherman Act. The threshold issue for extraterritorial application of the Sherman Act is subject matter jurisdiction. This article briefly reviews the relevant statutory background and then focuses on how the DOJ, the FTC, and the judiciary have interpreted the Foreign Trade Antitrust Improvement Act s direct, substantial, and reasonably foreseeable effect test the key to establishing Sherman Act subject matter jurisdiction over extraterritorial conduct. 2 II. STATUTORY BACKGROUND A. Sherman Act Section 1 of the Sherman Act declares illegal [e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations. 3 Sherman Act jurisdiction over anticompetitive conduct outside the United States has been subject to a variety of interpretations. 4 Over time, courts moved from a territorial approach that looked at the laws of the locality where the conduct occurred to an effects approach that examines the conduct s effect on U.S. markets. 5 Originally, courts used a strict territorial interpretation when applying the Sherman Act to foreign conduct. 6 This approach looked exclusively to the law of the country in which the anticompetitive activity occurred. 7 The U.S. Supreme Court applied this approach in American Banana Co. v. United Fruit Co., 8 holding that conduct occurring entirely in Central America was outside the scope of the Sherman Act. Justice Holmes 1. Sherman Act, 15 U.S.C. 1 7 (1988). 2. This article does not address personal jurisdiction, a separate and distinct requirement for extraterritorial application of the Sherman Act. For a general discussion of personal jurisdiction in the international antitrust context, see A.B.A. SEC. OF ANTITRUST L., 2 ANTITRUST LAW DEVELOPMENTS (4th ed. 1997) [hereinafter ANTITRUST LAW] U.S.C. 1 (1988). 4. See ANTITRUST LAW, supra note 2, at 992 (describing the evolution of the different approaches used to determine Sherman Act jurisdiction over foreign conduct). 5. See id. 6. Id. 7. Id U.S. 347, (1909). Given that the anticompetitive conduct occurred entirely in Central America, the Supreme Court commented: It is surprising to hear it argued that [the conduct was] governed by the act of Congress. Id. at 355.

3 2003] EXTRATERRITORIAL APPLICATION OF U.S. ANTITRUST LAW 13 stated, the general and almost universal rule is that the character of an act as lawful or unlawful must be determined wholly by the law of the country where the act is done. 9 More than thirty years later, an effect test replaced Justice Holmes s territorial approach. In United States v. Aluminum Co. of America (Alcoa), the Second Circuit recognized that any state may impose liabilities... for conduct outside its borders that has consequences within its borders which the state reprehends. 10 Under this rationale, the court found that the Sherman Act covered agreements that were intended to affect imports and did affect them. 11 Applying this test, the Alcoa court found jurisdiction existed over acts that occurred entirely in Canada but had an anticompetitive effect in the U.S. 12 Courts later developed different formulations of the effect test. 13 For instance, the Ninth Circuit established the following three-part test: (1) there must be some effect on American foreign commerce, (2) the effect must be large enough so as to create a cognizable injury to the plaintiff, and (3) the interests of international comity and fairness justify an assertion of jurisdiction. 14 The Second Circuit adopted its own formulation, requiring a foreseeable and appreciable effect on American commerce. 15 The different versions of the effect test eventually laid the groundwork for current interpretations of the Sherman Act, including the Supreme Court s Hartford Fire test described below. B. Foreign Trade Antitrust Improvements Act In an attempt to end the confusion resulting from the various effect tests, Congress passed the Foreign Trade Antitrust Improvements Act of 1982 (FTAIA). 16 The FTAIA amended the Sherman Act to expressly limit those circumstances in which the Act applies to foreign conduct. The limitations reflect Congress s goal of facilitating the domestic export of goods by exempting certain export trade from the Sherman Act s reach. 17 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 9. Id. at F.2d 416, 443 (2d Cir. 1945). 11. Id. at See id. at See, e.g., The In Porters, S.A. v. Hanes Printables, Inc., 663 F. Supp. 494, 497 & n.3 (M.D.N.C. 1987) (describing various formulations of the effect test); ANTITRUST LAW, supra note 2, at 993 ( Varying standards developed... for determining the magnitude and type of domestic effect necessary for jurisdiction under U.S. antitrust laws. ). 14. Timberlane Lumber Co. v. Bank of Am., 549 F.2d 597, 613 (9th Cir. 1976). The court held that the dismissal of the suit was improper because the lower court failed to examine the comity issue despite a determination that the conduct had a direct and substantial effect on foreign commerce. Id. at See Nat l Bank of Canada v. Interbank Card Ass n, 666 F.2d 6, 8 9 (2d Cir. 1981) (stating that the important question is whether the conduct can be foreseen to have any appreciable anticompetitive effects on United States commerce ). Id. at Foreign Trade Antitrust Improvements Act of 1982, Pub. L. No , 96 Stat (1982). Congress passed the FTAIA to eliminate the uncertainty that had arisen from the confusing array of standards employed by federal courts for determining when United States antitrust jurisdiction attaches to international business transactions. Eurim-Pharm v. Pfizer Inc., 593 F. Supp. 1102, 1105 (S.D.N.Y. 1984). 17. The FTAIA s declaration of purpose states: It is the purpose of this chapter to increase United States exports of products and services by encouraging more efficient provision of export trade services to United States producers and suppliers... by modifying the application of the antitrust laws to certain export trade. 15 U.S.C. 4001(b) (2002). For a discussion of the legislative history of the FTAIA, see Eurim-Pharm, 593 F. Supp. at

4 14 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 38:11 (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 provisions of sections 1 to 7 of [the Sherman Act], other than this section. [Proviso] If sections 1 to 7 of this title apply to such conduct only because of the operation of paragraph (1)(B), then section 1 to 7 of this title shall apply to such conduct only for injury to export business in the United States. 18 While the language of the FTAIA is somewhat clumsy, it boils down to the idea that the Sherman Act does not apply to conduct involving non-import foreign commerce unless the conduct has a direct, substantial, and reasonably foreseeable effect on either: (1) domestic commerce, such as extraterritorial conduct or foreign agreements having the effect of raising prices that U.S. consumers must pay for products in the United States; 19 (2) non-direct import commerce, such as inflated prices for foreign products that reach the U.S. market through any mechanism other than direct sales; 20 or (3) export trade or commerce of a U.S. company, such as foreign agreements that restrict or eliminate U.S. exports to a given market. 21 Absent one of these three circumstances, the FTAIA eliminates subject matter jurisdiction under the Sherman Act for non-import extraterritorial conduct. C. The FTAIA Does Not Apply to Import Commerce Hartford Fire Test Extraterritorial conduct that directly affects import commerce is analyzed under the Supreme Court s Hartford Fire test, not the FTAIA. In Hartford Fire Insurance Co. v. California, the Court abandoned the territorial approach of American Banana Co. in favor U.S.C. 6(a) (1988) (emphasis added). 19. See, e.g., Caribbean Broad. Sys., Ltd. v. Cable & Wireless PLC, 148 F.3d 1080, 1087 (D.D.C. 1998) (finding subject matter jurisdiction where a foreign radio station owner falsely claimed that its signal could reach the entire Eastern Caribbean and filed sham objections to the plaintiff s license application thereby keeping the plaintiff out of the market and increasing the prices paid by U.S. purchasers of radio advertising time); see also discussion infra Part III.C See, e.g., Carpet Group Int l v. Oriental Rug Importers Ass n, 227 F.3d 62, 64, 75 (3d Cir. 2000) (finding subject matter jurisdiction where foreign rug wholesalers thwarted the plaintiff s efforts to make rugs available to U.S. retailers from foreign manufacturers by eliminating the wholesaler in the chain of distribution thereby lowering rug prices to U.S. consumers); see also discussion infra Part III.C See, e.g., United States v. Time Warner, Inc., No. Misc.A (HHG), 1997 WL at *1, *4 5 (D.D.C. Jan. 22, 1997) (finding subject matter jurisdiction where U.S. broadcasters were forced to pay fixed fees to licensing bodies in the country where they sought to air their programs thereby impeding the broadcasters from exporting their programs); see also discussion infra Part III.C.2.

5 2003] EXTRATERRITORIAL APPLICATION OF U.S. ANTITRUST LAW 15 of the extraterritorial approach set forth by the Second Circuit in Alcoa. 22 The Court stated that the Sherman Act applies to foreign conduct that was meant to produce and did in fact produce some substantial effect in the United States. 23 Under Hartford Fire, if import commerce is at issue a court will not apply the direct, substantial, and reasonably foreseeable effect test of the FTAIA. 24 A good example of this is the First Circuit s decision in United States v. Nippon Paper Industries Co., 25 where the court refrained from applying the FTAIA to a Japanese corporation charged with conspiring to fix prices of facsimile paper sold in the United States. The court stated, [C]ase law now conclusively establishes that civil antitrust actions predicated on wholly foreign conduct which has an intended and substantial effect in the United States come within Section One [of the Sherman Act s] jurisdictional reach. 26 III. DISCUSSION A. The Definition of a Direct, Substantial, and Reasonably Foreseeable Effect is Uncertain For non-import commerce, courts apply the FTAIA s direct, substantial, and reasonably foreseeable effect test to determine whether subject matter jurisdiction exists. However, determining exactly what constitutes a direct, substantial, and reasonably foreseeable effect has created uncertainty. 27 Even the Supreme Court in Hartford Fire recognized that it was unclear whether Congress intended the direct, substantial, and reasonably foreseeable effect test to codify or amend the caselaw holding that the Sherman Act covered foreign conduct. 28 Agency guidelines and caselaw interpreting the FTAIA nonetheless provide some clarity. B. Agency Interpretation of Direct, Substantial, and Reasonably Foreseeable Effect is a Useful Starting Point The Department of Justice and the Federal Trade Commission (the Agencies ) have issued guidelines for interpreting the FTAIA. 29 The Agencies sought to provide guidance 22. Hartford Fire Ins. Co. v. California, 509 U.S. 764, (1993). 23. Id. at 796. The Court found that the plaintiff alleged that British reinsurers conspired to coerce U.S. primary insurers to limit coverage of certain risks with the effect of eliminating coverage for those risks. Id. at 795. This produced substantial effects on the U.S. market for insurance. Id. at Id. at 796 n.23 (citing 15 U.S.C. 6a(1)(A)) F.3d 1, 2 (1st Cir. 1997). Specifically, the Japanese manufacturers of the paper agreed to sell the paper to trading houses in Japan on the condition that the trading houses subsidiaries in the United States charge inflated prices to American consumers. Id. at Id. at 4; see also Carpet Group Int l, 227 F.3d at (holding that the FTAIA does not apply, by its terms, to import trade or commerce). 27. See, e.g., Nippon Paper, 109 F.3d at 4 ( The FTAIA is inelegantly phrased. ); Caribbean Broad Sys., Ltd. 148 F.3d at 1085 ( The precise effect of the FTAIA is yet to be determined. ); Den Norske Stats Oljeselskap AS v. Heeremac VOF, No. H , at 9 (S.D. Tex. July 12, 1999) (order dismissing for lack of subject-matter jurisdiction) (recognizing no clear, rigid test for determining extraterritorial subject-matter jurisdiction under the federal antitrust statutes ) (citation omitted). 28. Hartford Fire, 509 U.S. at n See U.S. DEP T OF JUSTICE AND FEDERAL TRADE COMM N, ANTITRUST ENFORCEMENT GUIDELINES FOR INTERNATIONAL OPERATIONS, 4 Trade Reg. Rep. (CCH) 13,107 (1995), reprinted in ANTITRUST LAW, supra note 2, app. D, available at [hereinafter GUIDELINES].

6 16 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 38:11 to businesses involved in international transactions on issues relating to subject matter jurisdiction. 30 These guidelines include a number of illustrative examples which assist in determining what constitutes a direct, substantial, and reasonably foreseeable effect. 1. FTAIA Subsection (1)(A) Domestic or Non-Direct Import Commerce Illustrative Example C, Variant (1) of the Enforcement Guidelines states that a non- U.S. company that agrees outside the United States to price fix in a foreign country, with no intent to price fix in or otherwise affect the U.S. market, does not fall within the jurisdiction of subsection (1)(A) of the FTAIA. 31 In this example, there is an agreement among non- U.S. companies to fix prices of materials sold in countries other than the United States with an explicit agreement that U.S. sales are outside the scope of the agreement. The agreement does enable cartel participants to charge less for their product in the United States several U.S.... manufacturers curtail their production, overall domestic output falls, and remaining manufacturers fail to invest in new or improved capacity 32 and thus causes an indirect effect on U.S. commerce. In addition, the anticompetitive cartel agreement could cause the price in the world market to stabilize or even rise, which also could indirectly affect U.S. prices. However, the guidelines provide that this conduct does not create the direct, substantial, and reasonably foreseeable effect necessary to trigger subject matter jurisdiction under the FTAIA: The mere fact that the existence of U.S. sales or the level of U.S. prices may ultimately be affected by the cartel agreement is not enough for either Hartford Fire jurisdiction or the FTAIA. Furthermore, in the absence of an agreement with respect to the U.S. market, sales into the U.S. market at non-predatory levels do not raise antitrust concerns. 33 Variant (2) of Example C produces the opposite result. In this variant, the cartel agreement specifically provides that cartel members will set agreed prices for the U.S. market at levels designed to soak up excess quantities that arise as a result of price increases in foreign markets. 34 Here, according to the guidelines, subject matter jurisdiction under subsection (1)(A) of the FTAIA exists: The critical element of a foreign price-fixing agreement with direct, intended effects in the U.S. is now present. The fact that the cartel believes its U.S. prices are reasonable, or that it may be exerting downward pressure on U.S. price levels, does not exonerate it. Variant 2 presents a case where the Agencies would need clear evidence of the prohibited agreement before they would consider moving forward. They would be particularly cautious if the apparent effect in the U.S. market appeared to be beneficial to consumers The Agencies caution, however, that the guidelines do not... provide a complete statement of the Agencies general enforcement policies because [n]o set of guidelines can possibly indicate how the Agencies will assess the particular facts of every case. GUIDELINES, supra note 29, See id (Illustrative Example C). 32. Id. 33. Id. 34. Id. 35. Id.

7 2003] EXTRATERRITORIAL APPLICATION OF U.S. ANTITRUST LAW 17 These examples show that indirect or de minimis effects on the U.S. domestic market will create subject matter jurisdiction only when there is an agreement to intentionally affect the domestic U.S. market. 2. FTAIA Subsection (1)(B) U.S. Export Commerce The FTAIA contains a proviso that if subsection (1)(B) is the only paragraph that applies to the foreign conduct, then the offender is subject to the Sherman Act only for injury to export business in the United States. 36 Illustrative Example E of the Enforcement Guidelines states that under this proviso, [T]he jurisdictional question is whether these actions create a direct, substantial, and reasonably foreseeable effect on the exports of U.S. companies. 37 If a proposed agreement were to interfere with U.S. companies exporting a product to a foreign nation, the agreement would escape subject matter jurisdiction only if the interference was so de minimis that it did not have the necessary substantial effect on U.S. export commerce. 38 In addition, it is important to note that the agency guidelines also state that the FTAIA can apply to U.S. exports that have a direct, substantial, and reasonably foreseeable effect on trade or commerce within the United States, or on import trade or commerce. 39 The guidelines contain two examples: First, if U.S. supply and demand were not particularly elastic, an agreement among U.S. firms accounting for a substantial share of the relevant market, regarding the level of their exports, could reduce supply and raise prices in the United States. 40 Second, conduct ostensibly export-related could affect the price of products sold or resold in the United States. This kind of effect could occur if, for example, U.S. firms fixed the price of an input used to manufacture a product overseas for ultimate resale in the United States. 41 It also should be noted that when Section (1)(B) is invoked, the proviso requires that there be actual injury to U.S. export business, as opposed to the mere effect on commerce required under Section (1)(A). 42 Thus, while under Section (1)(A) conduct that actually benefits competition can trigger subject matter jurisdiction, under Section (1)(B) such beneficial conduct would be insufficient U.S.C. 6(a) (1988). 37. GUIDELINES, supra note 29, (Illustrative Example E). 38. Id. 39. Id (emphasis added). 40. Id. 41. Id U.S.C. 6(a)(1)(B). 43. But cf. McElderry v. Cathay Pac. Airways, Ltd., 678 F. Supp. 1071, (S.D.N.Y. 1988) (rejecting plaintiffs argument that defendant s conduct was sufficient to trigger Section (1)(A) jurisdiction since alleged conduct would benefit, not injure, U.S. airlines operating in foreign markets).

8 18 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 38:11 C. Judicial Interpretation of Direct, Substantial, and Reasonably Foreseeable Effect For the most part, the courts have addressed the issue of what is a direct, substantial, and reasonably foreseeable effect on a case-by-case basis and have not promulgated any definite test. There are, however, some general guidelines evident from the caselaw. 1. What is a Substantial Effect? Individual Injury Is Insufficient Courts have held that, with one exception, an individual or a specific corporation suffering an adverse financial effect from a foreign anticompetitive agreement is insufficient by itself to create subject matter jurisdiction under the FTAIA. For example, in McGlinchy v. Shell Chemical Co., the Ninth Circuit found that injury only to customers or potential customers located in a foreign nation and consequential injury to one U.S. export company was insufficient for extraterritorial subject matter jurisdiction. 44 Instead, the court stated, a plaintiff must allege antitrust injury to the market or to competition in general, not merely injury to individuals or individual firms. 45 This reasoning was followed in McElderry v. Cathay Pacific Airways to dismiss allegations that thousands of American passengers have been overcharged for their baggage by [a foreign airline]. 46 According to the court, this was insufficient to create subject matter jurisdiction because an allegation of mere monetary injury is not enough to state a Sherman Act claim: A Sherman Act plaintiff must show injury to a market or to competition in general, not merely injury to individuals. 47 The exception to this general rule is where injury to an individual causes injury to an entire marketplace. This injury can occur where there is a limited number of competitors in a given market and injury to one, by definition, injures the market. In these circumstances, courts likely will find a direct, substantial, and reasonably foreseeable effect. 48 In defining what constitutes a substantial effect, some courts also focus on the size of the affected market and the relative harm of the anticompetitive foreign conduct. A good example of this is Access Telecom, Inc. v. MCI Telecommunications Corp. where the plaintiff identified a substantial effect on its own business and the business of other companies as well. 49 The Fifth Circuit characterized the relevant U.S. export market as definite and sizable with the plaintiff alone posting revenues of $3 million per year F.2d 802, (9th Cir. 1988). 45. Id. at 812 (citations omitted) F. Supp. at Id. at 1078 (quoting Fine v. Barry & Enright Prods., 731 F.2d 1394, 1399 (9th Cir. 1984)); see also American Aerospace Indus., Inc. v. Cahners, No , 1988 U.S. Dist. LEXIS 16899, at *3 (D.D.C. Jan. 20, 1988) ( Furthermore, the effect on commerce must be anticompetitive; the plaintiff must show injury to a market or competition in general. ). 48. See, e.g., Coors Brewing Co. v. Miller Brewing Co., 889 F. Supp. 1394, 1398 (D. Colo. 1995) (finding subject matter jurisdiction when an agreement between two brewing companies significantly harmed third-party brewing company thereby substantially weakening domestic competition); infra Part III.C.2 (discussing the facts of Coors Brewing) F.3d 694, 712 (5th Cir. 1999). Specifically, the plaintiff alleged that the defendant restrained the export market for U.S. telephone services to Mexico. The plaintiff allowed customers to place U.S.-based phone calls from Mexico customers in Mexico first called a number in Texas and then entered the phone number they wished to call. Id. at 701. This two-legged call cost less than a direct call. Id. The defendant sought to protect its government-granted monopoly over Mexican phone services by disconnecting the lines used by the plaintiff. See id. at Id. at 712.

9 2003] EXTRATERRITORIAL APPLICATION OF U.S. ANTITRUST LAW 19 Evidence of the collapse of eighty businesses further persuaded the court that the defendant s conduct produced a significant effect on the U.S. export market What is a Direct Effect? Although the courts have not specifically defined what constitutes a direct effect under the FTAIA, there are certain instructive examples. For instance, paying higher prices is certainly a direct harm to customers. 52 Further, (1) artificial inflation of prices of a given product; (2) artificial limits on the volume of imported products; (3) an artificial reduction in prices of a given product; and (4) artificial limits on the volume of products exported from the U.S. have been cited as examples of a direct, substantial, and reasonably foreseeable effect. 53 However, even if an anticompetitive cartel agreement applies worldwide and causes ripple effects within the United States, a plaintiff must prove a specific link to anticompetitive effect within the United States for a court to exercise extraterritorial jurisdiction. For instance, in Eurim-Pharm GmbH v. Pfizer, Inc., the court found that a cartel involved in worldwide price-fixing did not have a direct, substantial, or reasonably foreseeable effect on U.S. commerce. 54 The court reasoned that the plaintiff failed to establish a causal connection between the foreign activities and the price increase in the United States. 55 In addition, the plaintiff failed to show that the conduct prevented U.S. companies from manufacturing and selling. 56 An important indicia of a direct, substantial, and reasonably foreseeable effect is the elimination or significant reduction of competition in an appropriate market. For example, in Coors Brewing, the court found subject matter jurisdiction when the plaintiff alleged that extraterritorial anticompetitive conduct would effectively limit the domestic beer market to only two competitors. 57 Specifically, plaintiff Coors Brewing Company alleged that defendants anticompetitive conduct threatens [Coors s] status as principal competitor to Miller and Anheuser Busch in the United States beer market which, given the concentration in that market, weakens domestic competition and promotes a Miller/Anheuser Busch duopoly. 58 Elimination of competition can create a direct, substantial, and reasonably foreseeable effect even if only one individual is injured. In General Electric Co. v. Latin American Imports, S.A., the plaintiff sued for antitrust violations involving export trade. 59 The defendant moved to dismiss, arguing that the court lacked subject matter jurisdiction 51. See id. at Caribbean Broad. Sys., Ltd., 148 F.3d at Ferromin Int l Trade Corp. v. UCAR Int l, Inc., 153 F. Supp. 2d 700, 705 (E.D. Pa. 2001) F. Supp. 1102, (S.D.N.Y. 1984). 55. Id. There is, however, limited contrary authority on whether indirect effects are sufficient. In Galavan Supplements, Ltd. v. Archer Daniels Midland Co., No. C FMS, 1997 WL , at *3 (N.D. Cal. Nov. 18, 1997), the district court found that subject matter jurisdiction did exist over an international cartel whose anticompetitive conduct had spillover effect on U.S. price and production of certain goods. Id. at *3. This case appears to contradict Illustrative Example C, Variant (1) of the Enforcement Guidelines. 56. Eurim-Pharm, 593 F. Supp. at Coors Brewing Co. v. Miller Brewing Co., 889 F. Supp. 1394, (D. Colo. 1995). 58. Id. at 1398; cf. American Aerospace Indus., Inc. v. Cahners, No , 1988 U.S. Dist. LEXIS 16899, at *5 (D.D.C. Jan. 20, 1988) (finding no direct, substantial, and reasonably foreseeable injury to export trade because plaintiff did not allege that absent [plaintiff s] participation in the Exhibition no American manufacturer would be able to market its products in Asia ) F. Supp. 2d 749, 751 (W.D. Ky. 2001).

10 20 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 38:11 because the complaint failed to allege a direct, substantial, and reasonably foreseeable effect on export trade or export commerce: Even when [plaintiff s] allegations are taken as true, [defendant] argues, the export market for U.S.-branded appliances to Peru was not shut down; it remained the same before and after [defendant s] conduct, with the only change being the identity of the party who did the exporting. 60 The court disagreed: While this argument is attractive, the court must give credence to [plaintiff s] allegation that it was [defendant s] only potential competition in Peru, and that, had it not been crippled, as it alleges, it would have formed alliances with other U.S. exporters to compete with [defendant] in other words, even though [defendant s] actions affected only one business, its conduct was aimed at shutting down the market completely U.S. Ownership of a Company, by Itself, Does Not Create a Direct, Substantial, and Reasonably Foreseeable Effect Courts interpreting the FTAIA have held that a U.S.-owned company s participation in the agreement, absent other evidence of a direct, substantial, and reasonably foreseeable effect, does trigger FTAIA jurisdiction. For example, in Phillips Petroleum Co. v. Heeremac, the United States District Court for the Southern District of Texas found that the foreign-based subsidiary of a U.S. corporation that sustained injuries abroad did not have a direct and substantial effect on U.S. commerce. 62 The court stated, Although Phillips Norway was incorporated under the law of Delaware, the mere fact that an injured party might be a U.S. citizen or corporation is not enough to establish jurisdiction; the primary injury to that party must be caused in the United States and substantially affect U.S. commerce. 63 Thus, neither the nationality of the company causing the restraint on commerce nor that of the corporation sustaining injury confers jurisdiction on anticompetitive conduct that does not have the requisite domestic effects Location of Negotiations or Signing the Agreement, by Itself, Does Not Create a Direct, Substantial, and Reasonably Foreseeable Effect Courts also have held that the location of negotiations or any conduct leading to the anticompetitive agreement does not alter the jurisdictional inquiry. 65 The court in United 60. Id. 61. Id. at Phillips Petroleum Co. v. Heeremac, No. H (S.D. Tex. Jan. 22, 1999). 63. Id. at See McGlinchy v. Shell Chem. Co., 845 F.2d 802, 814 (9th Cir. 1988) (finding no extraterritorial subject matter jurisdiction absent requisite effects, even over conduct in which U.S. company is involved); The In Porters, S.A. v. Hanes Printables, Inc., 663 F. Supp. 494, 496 (M.D.N.C. 1987) (finding no subject matter jurisdiction over agreement made with U.S. company absent evidence of injury in the United States); Den Norske Stats Oljeselskap AS, No. H at 9, n.5 (order dismissing for lack of subject matter jurisdiction) (stating that the FTAIA was intended to exempt from United States antitrust law any conduct that lacks the requisite domestic effect, even where such conduct... involves United States-owned entities operating abroad (quoting Eurim- Pharm, 593 F. Supp. at 1106)). 65. See McGlinchy, 845 F.2d at 814 (finding FTAIA exempts from U.S. antitrust laws conduct lacking domestic effects, even where such conduct originates in the United States and regardless of whether there was anticompetitive conduct in the United States ); McElderry v. Cathay Pac. Airways, 678 F. Supp. 1071, 1077 (S.D.N.Y. 1988) ( An anticompetitive effect on [U.S.] commerce is required for jurisdictional nexus, regardless of whether there was anticompetitive conduct in the United States. ); The In Porters, 663 F. Supp. at 496 (finding

11 2003] EXTRATERRITORIAL APPLICATION OF U.S. ANTITRUST LAW 21 Phosphorus, Ltd. v. Angus Chemical Co. recognized this principle, stating that conduct on American soil is not always sufficient to prove effect on domestic commerce because it is the situs of the effect, not the conduct, which is crucial. 66 Courts, therefore, may exercise jurisdiction regardless of whether the anticompetitive conduct occurred in the United States. 5. The Effect Must Be to a U.S. Market Either Domestic, Import, or Export It is worth emphasizing that the requisite direct, substantial, and reasonably foreseeable effect must occur in a U.S. market either domestic, import, or export. For example, in Caribbean Broadcasting Systems, Ltd. v. Cable & Wireless, PLC, the court held that a plaintiff satisfied his pleading requirements by alleging the following: (1) a significant market for the sale of English-language radio advertising in the Eastern Caribbean, which includes Puerto Rico and the U.S. Virgin Islands, (2) that many companies based in the United States are customers in this market, (3) that there are substantial barriers to entry into the market, and (4) that defendants engaged in intentional conduct that gave them monopoly power and injured consumers in this market Foreign Plaintiffs Can Establish Subject Matter Jurisdiction In some circumstances, subject matter jurisdiction does exist for foreign plaintiffs who suffer injuries abroad as the result of antitrust violations committed by domestic U.S. firms. This was explained by the district court in In re Microsoft Corp. Antitrust Litigation. 68 The court cited the following legislative history: This test, however, does not exclude all persons injured abroad from recovering under the antitrust laws of the United States. A course of conduct in the United States e.g., price fixing not limited to the export market would affect all purchasers of the target products or services, whether the purchaser is foreign or domestic. The conduct has the requisite effects within the United States, even if some purchasers take title abroad or suffer economic injury abroad. 69 Based on this, the district court stated: Congress did contemplate that the effects test would encompass not only conduct committed outside of the United States having effects within the United States, but also conduct committed within the United States having effects both within and outside of the United States. 70 no subject matter jurisdiction arising from exclusive distribution agreement between U.S. manufacturer and French distributor despite bulk of negotiations occurring in the United States) F. Supp. 2d 1003, 1009 (N.D. Ill. 2001) F.3d at ; see also Coors Brewing, 889 F. Supp. at 1398 (explaining that the Sherman Act will not apply to conduct affecting foreign markets, consumers or producers unless there is also a direct, substantial, and reasonably foreseeable effect on the domestic market (subsection (1)(A)) or on opportunities to export from the United States. ); Liamuiga Tours v. Travel Impressions, Ltd., 617 F. Supp. 920, (E.D.N.Y. 1985) (court lacked jurisdictional nexus under the FTAIA where restraint of trade and conspiracy claims involved exclusively lost business and anticompetitive effects in St. Kitts, not in the United States) F. Supp. 2d 702, 715 (D. Md. 2001). 69. Id. (citing H.R. REP. NO , at 10 (1982)). 70. Id.; see also United Phosphorus, 131 F. Supp. 2d at 1009 ( When the activity complained of has a demonstrable effect on United States domestic commerce, foreign corporations injured abroad may seek recovery

12 22 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 38:11 In an earlier case, the U.S. Supreme Court allowed a foreign plaintiff to bring an antitrust action, citing policy reasons in support of its decision. 71 The Court stated that the ultimate purpose of the antitrust laws is to protect U.S. consumers. Excluding foreign plaintiffs would defeat this purpose because it would encourage businesses to participate in anticompetitive conspiracies affecting American consumers in the expectation that the illegal profits they could safely export abroad would offset any liability to plaintiffs at home. 72 On the other hand, allowing foreign victims to bring suit forces businesses to consider the domestic as well as the international effects of their conduct There Must Be a Causal Connection Between the Plaintiff s Injury and the Direct, Substantial, and Reasonably Foreseeable Effect A much-discussed issue in recent caselaw on the subject is whether a plaintiff must allege an injury that is caused by the requisite effect on the U.S. market. The weight of authority says yes. 74 Courts reason that requiring such a connection between the injury and the domestic effect is proper given the purpose of the FTAIA to protect American exporters from liability when conducting transactions abroad. 75 Congress adopted the FTAIA because American exporters could not compete on the foreign market they feared liability under the Sherman Act if they engaged in anticompetitive conduct necessary to succeed in foreign markets. 76 In light of the purpose to protect American exporters, it does not make sense to protect foreign plaintiffs injured by effects felt abroad, and not by effects to the U.S. market, by allowing them to recover (which is contrary to the rule in In re Microsoft Corp.). The In Porters decision is instructive. In this case, the court dismissed a claim for lack of subject matter jurisdiction under FTAIA because the plaintiff was not within the class of U.S. export manufacturers allegedly injured by the foreign anticompetitive under the Sherman Act. ). But see In re Copper Antitrust Litig., 117 F. Supp. 2d 875, 887 (W.D. Wis. 2000) ( It is not reasonable to think that Congress wanted to provide a forum for mostly foreign plaintiffs who were injured abroad by effects felt abroad and not in American markets, even if the wrongdoer's conduct produced other anticompetitive effects in the United States. ); see also discussion infra Part III.C Pfizer, Inc. v. Gov t of India, 434 U.S. 308, (1978) (holding that a foreign plaintiff injured by an antitrust violation has the right to sue). One commentator noted that the Court s concern about deterrence in Pfizer no longer holds up given the development of antitrust laws in other countries. See Ronald W. Davis, International Cartel and Monopolization Cases Expose a Gap in Foreign Trade Antitrust Improvements Act, 15 ANTITRUST 53, 54 (2001). ( [I]n view of the spectacular growth of antitrust in Europe and elsewhere, international cartels are sufficiently deterred without the need to extend U.S. treble damage protection to all victims around the world. ). In addition, Davis argues that the Pfizer court failed to consider the risk of flooding the federal courts with claims by foreign plaintiffs and undermining the trend toward international antitrust harmonization by forcing cartels to pay damages to both foreign plaintiffs and U.S. purchasers. Id. 72. Pfizer, Inc., 434 U.S. at See id. 74. Interestingly, one commentator noted that an approach allowing recovery only where the plaintiff was injured by the domestic effect could introduce an unexplained dichotomy between domestic and international antitrust law because of current doctrines of antitrust standing that allow parties to bring claims regardless of whether they were injured. Salil K. Mehra, Deterrence: The Private Remedy and International Antitrust Cases, 40 COLUM. J. TRANSNAT'L L. 275, 292 (2002). Mehra describes, as an example, the case of an intermediary who passes on the overcharge and is thus not injured. Some courts nevertheless will allow the uninjured intermediary to bring an antitrust claim. Id. 75. See, e.g., In re Copper Antitrust Litig., 117 F. Supp. 2d at 887 ( Congress extends domestic jurisdiction to extraterritorial conduct only when the plaintiffs have been injured by the effects on the domestic market. This is consistent with the main purpose of the Foreign Trade Antitrust Improvements Act, which was to protect American exporters from liability under the Sherman Act where the exporters were operating abroad. ). 76. See id.; Eurim-Pharm, 593 F. Supp. at 1105 (explaining the legislative history of the FTAIA); see also supra note 17 and accompanying text.

13 2003] EXTRATERRITORIAL APPLICATION OF U.S. ANTITRUST LAW 23 conduct. 77 The court did not disagree with the fact that the anticompetitive agreement in question affected U.S. export commerce. To the contrary, the court acknowledged that the exclusive distribution agreement required the foreign plaintiff to cease conducting business with certain U.S. exporters. 78 Such injured U.S. exporters, however, did not file suit claiming an effect on the U.S. market; instead, the foreign distributor did. Regardless of any direct, substantial, and reasonably foreseeable effect on the U.S. exporters commerce, therefore, the court held that a foreign company could not piggy-back[] onto the injury of a United States exporter. 79 A similar result was reached by the United States District Court for the Southern District of Texas in Den Norske Stats Oljeselskap v. Heeremac. 80 The plaintiff in this case invoked a worldwide conspiracy argument, claiming that the defendants owned or controlled most of the heavy-lift derrick barges in the world and conspired to eliminate competition worldwide by price fixing, bid rigging, dividing markets, and allocating customers, [which] result[ed] in higher prices and limited alternative access to [their] services. 81 The court rejected this argument and dismissed for lack of subject matter jurisdiction under the FTAIA, reasoning that the plaintiff s injury must occur within the context of injury to the U.S. market and not merely be ancillary to injury to U.S. commerce. This was true even though the alleged conspiracy had some effect on U.S. commerce: While the alleged foreign, global anticompetitive conspiracy to fix prices, rig bids, and allocate markets in the North Sea and resulting injuries to [plaintiff s] projects in the North Sea may have very indirectly had an attenuated effect on projects in the United States... they did not have a direct, substantial, and reasonably foreseeable anticompetitive effect on United States trade or commerce. 82 The court further stated that United States antitrust laws do not extend to protect foreign markets from anticompetitive effects and do not regulate the competitive conditions of other nations economies. 83 The Ninth Circuit reached the same conclusion in McGlinchy v. Shell Chemical Co. 84 There, the plaintiffs did allege that the anticompetitive conduct had an effect on foreign export sales. However, the plaintiffs never alleged that they were exporters. 85 There was no link, therefore, between the alleged anticompetitive effect injury to the U.S. export market and the plaintiffs injury. According to the court, mere monetary injury standing 77. The In Porters S.A., 663 F. Supp. at Id. at Id. at Den Norske Stats Oljeselskap AS, No. H (order dismissing for lack of subject matter jurisdiction). This decision was affirmed by the Fifth Circuit. Den Norske Stats Oljeselskap AS v. Heeremac VOF, 241 F.3d 420 (5th Cir. 2001). The plaintiff filed a certiorari motion before the Supreme Court. The Government filed an amicus brief opposing certiorari and agreeing with the Fifth Circuit that for subject matter jurisdiction to exist, a plaintiff s injury must be caused by the direct, substantial, and reasonably foreseeable effect on U.S. commerce. The Supreme Court declined certiorari. Statoil ASA v. Heeremac V.O.F, 534 U.S (2002). 81. Den Norske Stats Oljeselskap AS, No. H , at Id. at Id. at 15 (citation omitted); see also In re Microsoft Corp., 127 F. Supp. 2d 702, 715 (D. Md. 2001) ( I therefore have no difficulty in concluding that foreign consumers who have not participated in any way in the U.S. market have no right to institute a Sherman Act claim. ) F.2d 802 (9th Cir. 1988). 85. Id. at 815.

14 24 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 38:11 alone is not enough to trigger subject matter jurisdiction; instead, a plaintiff s alleged injury must stem from the alleged anticompetitive effect. 86 A further example is the Ferromin Int l Trade Corp. decision. 87 Here, foreign company plaintiffs brought actions against various entities for alleged violations of the Sherman Act caused as a result of price fixing and market allocation in the worldwide market for graphite electrodes. The court held that under Section 6(a)(2) of the FTAIA, the plaintiffs must show not only that the conduct which caused the injury has direct, substantial and reasonably foreseeable effect on the United States market place [sic], but also must show that it is the effects of this conduct which gives rise to their claims. 88 Accordingly, the court dismissed the claims of those plaintiffs who alleged they were injured by having to pay inflated prices abroad for graphite electrodes: these alleged purchases had no connection whatsoever to the United States the electrodes were all manufactured outside the United States, shipped to plaintiffs locations outside the United States, invoiced outside the United States and used in steel mills outside the United States. 89 Contrary to the cases described above, the Second Circuit recently interpreted the FTAIA as not requiring that the domestic effect give rise to the plaintiff s injury. In Kruman v. Christie s International, the foreign plaintiffs alleged that the defendants fixed prices at auctions held outside the United States. 90 The Second Circuit held that the effect on domestic commerce need not be the basis for a plaintiff s injury. 91 In reaching its decision, the court focused on the language of subsection two: such effect gives rise to a claim under the provisions of sections 1 to 7 of [the Sherman Act]. 92 The court first explained that the phrase gives rise to a claim only requires that the domestic effect violate the substantive provisions of the Sherman Act, not that the domestic effect be the basis of the plaintiff s injury. 93 The court then argued that adopting the defendant s interpretation (which was similar to that of the court in Den Norske) would mean replacing the word a with the words the plaintiff s. 94 IV. CONCLUSION The FTAIA as well as the agency and judicial interpretations govern whether extraterritorial conduct will violate the Sherman Act. The FTAIA provides that the proposed agreement must have a direct, substantial, and reasonably foreseeable effect on U.S. commerce, either domestic, non-direct import or export, to trigger subject matter 86. See id F. Supp. 2d 700 (E.D. Pa. 2001). 88. Id. at Id. at F.3d 384, 389 (2d Cir. 2002). The Second Circuit vacated the district court s dismissal of the suit. The district court had held that the FTAIA permits suit... only where the conduct complained of had direct, substantial and reasonably foreseeable effects in the United States and the effects giving rise to jurisdiction also are the basis for the alleged injury. Kruman v. Christie s Int l, 129 F. Supp. 2d 620, 625 (S.D.N.Y. 2001). 91. Kruman, 284 F.3d at Id. at See id. 94. Id. at 400. Judge Higginbotham made a similar argument in his dissent in Den Norske Stats Oljeselskap AS v. Heeremac VOF, 241 F.3d 420, 432 (5th Cir. 2001), stating: The word a has a simple and universally understood meaning. It is the indefinite article. There are many terms of art about which one can debate... but this word is not one of them. If the drafters of the FTAIA had wished to say the claim instead of a claim, they certainly would have. This reading of what gives rise to a claim is an easier test for plaintiffs to meet because the domestic effect need only give rise to an antitrust claim for someone, not necessarily the plaintiff. Mehra, supra note 74, at

15 2003] EXTRATERRITORIAL APPLICATION OF U.S. ANTITRUST LAW 25 jurisdiction. This effect requires injury to U.S. markets or competition in general. Mere injury to an individual entity will be construed as having a de minimis effect as to not constitute being direct or substantial, unless injury to an individual entity also injures the entire market. A trickle-down effect of raising prices in a foreign nation leading to increased prices in the United States likely will not be found either reasonably foreseeable, direct, or substantial. Elimination or significant reduction of competition in an appropriate market likely is sufficient. It is the situs of the effect that controls, not the location of negotiations or citizenship of the affected entity. Finally, the weight of authority holds that a plaintiff s injury must be caused by the alleged effect for subject matter jurisdiction to exist.

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