Grappling with Reach of Sherman Act in Suits by Non-U.S. Consumers

Circuit courts disagree on interpretation of foreign trade antitrust improvements act
by Gordon L. Lang and James D. Kole

8/11/2003

In Empagran v. Hoffmann-La Roche, 315 F.3d 338 (D.C. Cir. 2003), the U.S. Court of Appeals for the D.C. Circuit held that the Foreign Trade Antitrust Improvements Act of 1982 (FTAIA), 15 U.S.C. §6a, did not bar foreign persons who bought vitamins in transactions that occurred outside the United States from proceeding with their federal antitrust claims against the members of an alleged international price-fixing cartel. The U.S. Court of Appeals for the Second Circuit rendered a similar interpretation of the FTAIA in Kruman v. Christie’s Int’l, 284 F.3d 384 (2d Cir. 2002). The U.S. Court of Appeals for the Fifth Circuit has held to the contrary in Den Norske Stats Oljeselskap As v. HeereMac, 241 F.3d 420 (5th Cir. 2001), and the U.S. Department of Justice and U.S. Federal Trade Commission support the Fifth Circuit’s view.

The solicitor general of the United States has now urged the D.C. Circuit to grant rehearing en banc in Empagran and reverse.1 Both sides of the debate contend that their interpretation of the FTAIA will best serve antitrust policy. We discuss here the FTAIA, the appellate decisions, and the importance of an issue that seems destined to reach the U.S. Supreme Court—whether foreign persons who allege they were the victims of a conspiracy that adversely affected both the United States and foreign countries, but whose injury occurred from commercial transactions that took place outside the United States, may obtain redress in U.S. courts under the U.S. antitrust laws.

The Sherman Act

Section 1 of the Sherman Act makes illegal “every contract, combination...or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.” 15 U.S.C. §1.2 Section 1 is the primary prosecutorial weapon against price-fixing conspiracies. Violators are subject to criminal prosecution and penalties, civil injunctive relief, and, in private actions, treble damages.3

Congress enacted the FTAIA in 1982 as a response to “the apparent perception among businessmen that American antitrust laws are a barrier to joint export activities,” and because “courts differ in their expression of the proper test for determining whether United States antitrust jurisdiction over international transactions exists.”4 Congress intended the FTAIA to set forth a “single, objective test” to provide a “simple and straightforward clarification of existing American law and the Department of Justice enforcement standards.”

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—
    1. on trade or commerce which is not trade or commerce with foreign nations, or on import trade or import commerce with foreign nations; or

    2. 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 this title [the Sherman Act], other than this section.

If sections 1 to 7 of this title apply to such conduct only because of the operation of paragraph (1)(B), then sections 1 to 7 of this title shall apply to such conduct only for injury to export business in the United States.5

Thus, under the FTAIA, Sherman Act jurisdiction over conduct with foreign nations exists only if: (1) the “conduct” has a “direct, substantial, and reasonably foreseeable effect” on U.S. domestic commerce, and (2) “such effect gives rise to a claim” under the Sherman Act.

The House committee that recommended the legislation was aware that foreign persons might seek redress in U.S. courts for foreign injuries. The bill

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.... Foreign purchasers should enjoy the protection of our antitrust laws in the domestic marketplace.6

Furthermore, “to deny foreigners a recovery” under the U.S. antitrust laws would limit the United States antitrust laws’ deterrent effect.

On the other hand, the committee reported that foreign buyers who are injured by a price-fixing conspiracy directed “solely to exported products or services, absent a spillover effect on the domestic marketplace,” would not be able to proceed in the U.S. courts, and that a “transaction between two foreign firms, even if American owned,” would not be within U.S. antitrust jurisdiction merely because of that ownership.

Focus on Foreign Cartels

The mid- to late 1990s witnessed a surge in the government’s investigation and prosecution of alleged international pricefixing conspiracies and other cartels. In December 1999, the Justice Department’s Antitrust Division reported that half of the previous two years’ corporate criminal defendants were foreign-based, that 90 percent of the more than $1.5 billion in criminal fines the division had obtained in the last three years were from the prosecution of multinational firms and international cartels, and that 35 grand juries were investigating alleged international cartels.7 Not surprisingly, the government’s prosecutions spawned a series of private treble damage actions, including actions brought by overseas purchasers. Those actions, in turn, led to Den Norske, Kruman and Empagran.8

Den Norske arose from the government’s criminal investigation of the marine construction industry. A Norwegian owner and operator of oil and gas drilling platforms alleged it paid inflated prices for heavy lift barge services in the North Sea as a result of the defendants’ alleged bidrigging and allocation of customers, territories and projects in the North Sea and in U.S. waters in the Gulf of Mexico. According to the plaintiff, the defendants traded North Sea projects for Gulf of Mexico projects. One of the defendants had pled guilty and agreed to pay a fine for “rigging bids for the sale of heavy-lift derrick barge and related marine construction services in the United States and elsewhere.”

The district court dismissed the case, holding that because the plaintiff’s complaint arose from projects outside the United States, its claims lacked the necessary “direct, substantial, and reasonably foreseeable anticompetitive effect” on U.S. domestic commerce, and that the plaintiff lacked standing.

The Fifth Circuit affirmed 2-1. First, the majority noted that the Sherman Act applies to “trade or commerce with foreign nations.” The immediate acts of which the plaintiff complained involved commerce between foreign nations. The court “doubt[ed] that foreign commercial transactions between foreign entities in foreign waters” are cognizable under the Sherman Act.

The majority then turned to the FTAIA. The court found that the plaintiff had adequately alleged the defendant’s conduct—the conspiracy—had the requisite direct, substantial, and reasonably foreseeable effect on U.S. domestic commerce. Plaintiff alleged that purchasers in the U.S. paid inflated prices for heavy-lift services, and that the agreement caused Americans to pay more for oil. The court held that the FTAIA barred the plaintiff’s action, however, because it requires that the effect on U.S. commerce give rise to the plaintiff’s claim. Plaintiff could not meet that test, said the court, because its injury did not “stem from the effect of higher prices for heavy lift services in the Gulf.” The court concluded that “the plain language of the FTAIA precludes subject matter jurisdiction.” The court added that its construction of the statute was supported by the legislative history and prior decisions, including the district court decision in Kruman.

Judge Patrick E. Higginbotham dissented that the majority’s reading of the “such effect gives rise to a claim” requirement was erroneous. Den Norske, 241 F.3d at 431. The effect on U.S. commerce, he wrote, must only give rise to a claim by someone, not necessarily the plaintiff. Had Congress wanted the statute to require that the effect gives rise to the plaintiff’s claim, it would have said so. Furthermore, he argued, denying standing to foreign plaintiffs would lessen the deterrent value of private treble damage actions. Deterring overseas portions of conspiracies is important, he wrote, because some conspiracies that affect the United States are dependent upon success overseas.

Kruman arose from the Justice Department’s investigation and prosecution of a price-fixing conspiracy between Sotheby’s and Christie’s for auction service fees. Christie’s obtained amnesty from criminal prosecution from the Justice Department in return for its cooperation. The government charged Sotheby’s with fixing prices “in the United States and elsewhere” in restraint of “interstate and foreign trade and commerce.”9 Sotheby’s pled guilty and agreed to a $45 million fine.

After Christie’s and Sotheby’s settled with domestic class-action plaintiffs, the district court dismissed the foreign plaintiffs, because the conduct at issue did not have a direct, substantial, and reasonably foreseeable effect on domestic commerce. Recognizing that the term “conduct” was capable of alternative understandings, Judge Lewis A. Kaplan held that an appropriate reading of the statute was that “conduct” meant the overt acts that caused the plaintiffs’ injury. Kruman, 129 F.Supp.2d 620, 625. Here, those acts—the sale of auction services overseas to plaintiffs—did not affect U.S. domestic commerce. Accordingly, the FTAIA barred the plaintiff’s claims.

A unanimous Second Circuit panel reversed. It concluded that the “conduct” required to have the effect on U.S. domestic commerce referred to the alleged international conspiracy to fix auction fees, not the plaintiffs’ individual transactions. Furthermore, unlike the Den Norske court, it found that the effect on U.S. domestic commerce need not give rise to the plaintiffs’ claim, but only to a claim: the conduct need only “violate the substantive provisions of the Sherman Act.”

The plaintiffs’ claim satisfied the FTAIA, the Second Circuit held, because plaintiffs alleged that some of the conspiracy’s conduct injured domestic commerce and (accepting an argument rejected in Den Norske) the foreign transactions helped the price-fixing conspiracy succeed in the U.S. Finally, the Second Circuit concluded that its interpretation of the FTAIA furthered antitrust enforcement by deterring conduct directed at foreign markets, because the success of domestic schemes may be enhanced by the success of a foreign scheme.

Empagran arose from the government’s well-publicized investigation and prosecution of an international vitamin cartel. Private plaintiffs filed a class action on behalf of both domestic and foreign purchasers against numerous defendants, some of whom had pled guilty to criminal charges. The district court, citing the lower court’s opinion in Kruman, dismissed the claims of foreign plaintiffs who purchased vitamins outside the United States. The conspiracy alleged had the necessary effect on domestic commerce; the wholly foreign transactions upon which the plaintiffs based their claims did not. Furthermore, plaintiffs’ claims did not arise from the effect on U.S. commerce they alleged.

The D.C. Circuit reversed 2-1. Writing for the majority, Judge Harry T. Edwards stated that the FTAIA had “no ’plain meaning.’” He recognized the split between the Second and Fifth circuits, and stated the panel’s view was “somewhat closer” to the Second Circuit’s than the Fifth’s. Like both the Second and Fifth circuits, the majority concluded that the FTAIA’s requirement that the “conduct” must have a direct, substantial, and reasonably foreseeable effect on domestic commerce was satisfied by the allegation that the conspiracy as a whole had such an effect.

The majority then held that the plaintiff’s allegations satisfied the “gives rise to a claim” test. The FTAIA requires only that the effect on U.S. commerce give rise to a private plaintiff’s claim, not the claim of the plaintiff before the court.10 Furthermore, disallowing suits by foreign purchasers who were “not injured by the conspiracy’s U.S. effects runs the risk of inadequately deterring global conspiracies that harm U.S. commerce.” The court held that the plaintiffs had standing, because they paid higher prices due to conduct that violated the Sherman Act.

Judge Karen Lecraft Henderson dissented that the district court and Den Norske followed a more natural reading of the statute.

After receiving a petition for rehearing en banc, the D.C. Circuit invited the solicitor general to express the government’s views. The government urged the petition be granted because of the “exceptional and recurring importance of the issue.”11 It argued that Den Norske was correct, and that the panel’s holding would burden the courts with lawsuits. The government’s most interesting argument, though, was its rebuttal of the deterrence theory: the majority’s holding would actually harm antitrust enforcement by deterring conspirators from informing on others and themselves through the Antitrust Division’s amnesty (or Corporate Leniency) program—the government’s “number one source of leads for breaking up international cartels.”12 Conspirators facing potential treble damage actions from foreign-injured plaintiffs might choose to forego amnesty or a plea agreement, leading to fewer private treble damage actions by those harmed in the U.S., the government argued.

Commentary

Here are some things to consider in light of the circuit split and the government’s position.

  • The FTAIA has not lived up to Congress’ promise of a “simple and straightforward clarification of existing American law.” Indeed, the twelve judges who participated in the district court or appellate decisions in Den Norske, Kruman, and Empagran split 6-6.

  • Resolving the issue is important. Numerous cases are pending. Given the number of markets dominated by producers or sellers from different countries, as well as the Justice Department’s interest in international markets, other prosecutions of international cartels are certain to occur, and treble damage cases are sure to follow. In conspiracies where a substantial portion of consumers are outside the U.S., the financial stakes may be enormous.

  • Both sides’ deterrence arguments make sense, but may be overstated. Theoretically, permitting plaintiffs who are victims of foreign transactions in worldwide conspiracies to sue in U.S. courts could deter future antitrust conspiracies. But for the U.S. portion of a conspiracy, price-fixers are subject to potential criminal prosecution and huge fines, and individuals are subject to potential imprisonment, as well as treble civil damage liability to U.S. victims. It is not obvious that potential civil liability under U.S. law for foreign injuries would make the difference in an individual’s decision to engage, or not engage, in price-fixing, market allocation, etc., even if the individual understood the fine points of jurisdiction under the FTAIA.

  • The government’s amnesty program has undoubtedly been crucial to the government’s enforcement efforts. But as the government recognizes, without regard to foreign transactions, potentially huge treble damage liability to U.S. customers already provides a disincentive to seeking amnesty. (Christie’s, for example, received criminal amnesty in the auction cases, but it later agreed to pay over $250 million to treble damage plaintiffs.) And foreign victims may have remedies in their own countries which permit them to recover against cartels. The extent to which the Kruman/Empagran approach would cause corporations to forego amnesty applications who otherwise would seek it is speculative.

  • Den Norske, Kruman, and Empagran present the best facts for plaintiffs: criminal conduct (at least for U.S. domestic commerce). By contrast, a plaintiff’s argument for jurisdiction might seem less sympathetic where the alleged conduct involves agreements among competitors that are neither criminal nor automatically unlawful, or actions of a single firm that are alleged to constitute civil monopolization.13 But the courts’ interpretations of the FTAIA apply to such noncriminal conduct as well.

  • Unless and until the issue is resolved, for certain plaintiffs, forum selection will be crucial.

  • Regardless of whether the D.C. Circuit grants rehearing en banc, the circuit split and Justice Department’s potential opposition to the Kruman/Empagran approach will continue. Absent action by Congress, the dispute seems headed to the U.S. Supreme Court.
  1. Brief for the United States and the Federal Trade Commission as Amici Curiae in Support of Petition for Rehearing En Banc, Empagran v. Hoffman-LaRoche, No. 01-7115 (D.C. Cir. filed March 24, 2003), available at the U.S. Department of Justice, Antitrust Division Web site. [Back to Reference]

  2. Section 1 reaches other conduct as well. Section 2 of the Sherman Act, 15 U.S.C. §2, similarly prohibits monopolization, attempted monopolization, and conspiracy to monopolize such trade or commerce. [Back to Reference]

  3. Section 4A of the Clayton Act, 15 U.S.C. §15(a), permits any person who shall be “injured in his business or property by reason of anything forbidden in the antitrust laws” to bring suit in district court, and, if successful, to recover treble damages, costs, and attorneys’ fees. The courts have added additional requirements for antitrust damage standing, including that the plaintiff has incurred “antitrust injury” (“injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful,” Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc. 429 U.S. 477, 489 (1977)), and that the plaintiff’s injury be direct. [Back to Reference]

  4. H.R. REP. NO. 97-686, at 2 (1982), 97th Cong., 2d Sess., reprinted in 1982 U.S.C.C.A.N. 2487. [Back to Reference]

  5. 15 U.S.C. §6(a). A similar provision modifies the FTC act. 15 U.S.C. §45(a)(3). [Back to Reference]

  6. H.R. REP. NO. 97-686, at 10. [Back to Reference]

  7. Gary R. Spratling, then deputy assistant attorney general for Antitrust, U.S. Department of Justice, “International Cartels: The Intersection between FCPA Violations and Antitrust Violations,” presented before the American Conf. Institute 7th Nat’l Conf. on Foreign Corrupt Practices Act (Dec. 9, 1999) 10. [Back to Reference]

  8. There are several other decisions in the district courts. One of those, Ferromin Int’l Trade Corp. v. UCAR Int’l, 153 F.Supp.2d 700 (E.D. Pa. 2001), which followed Den Norske, has been argued on appeal before the U.S. Court of Appeals for the Third Circuit. In Metallgesellschaft v. Sumitomo, 325 F.3d 836 (7th Cir. 2003), the court stated a prior decision “pointed in the direction” of the Second and D.C. circuits, but did not decide the FTAIA issue. [Back to Reference]

  9. Information, United States v. Sotheby’s Holdings, Inc., Criminal No. 00 Cr. 1081 (S.D.N.Y. filed Oct. 5, 2001), available at U.S. Department of Justice, Antitrust Division Web site. [Back to Reference]

  10. Compare to Kruman, which held that giving rise to a government claim is sufficient. [Back to Reference]

  11. Brief for the United States, supra note 1. [Back to Reference]

  12. Id. The program grants the first cooperating corporation (and typically its personnel) amnesty from criminal antitrust prosecution, see “Corporate Leniency Program,” 4 Trade Reg. Rep. (CCH) ¶13,113, at 20,649-21, 20,649-22, but grants no protection against damage actions. [Back to Reference]

  13. See, e.g., In re Microsoft Corp. Antitrust Litigation, 127 F.Supp.2d 702 (D. Md. 2001). [Back to Reference]

Gordon L. Lang is a partner in Nixon Peabody’s Washington, D.C., office, and a former trial attorney with the Antitrust Division of the U.S. Department of Justice. James D. Kole is an antitrust partner in the firm’s Rochester, New York, office. Leta A. McCollough, an associate, and Jeewon Kim, a summer associate, are in the firm’s Washington, D.C., office, and assisted in the preparation of this article.

Reprinted with permission from the August 11, 2003, edition of the New York Law Journal
©2003 ALM Properties, Inc. All rights reserved.
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