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By: Abram Ellis, John Terzaken, and Jonathan Myers, Simpson Thacher & Bartlett LLP
This article addresses the extraterritorial reach of U.S. antitrust laws—that is, their application to international trade or commerce—specifically discussing the interplay between the Sherman Act, which prohibits anticompetitive conduct, and the Foreign Trade Antitrust Improvements Act (FTAIA), which defines the Sherman Act’s extraterritorial application.
GENERALLY, THE FTAIA PROVIDES THAT THE SHERMAN ACT does not apply to purely foreign activity, but the Sherman Act could apply to partially foreign activity. This article outlines significant considerations to help you understand when U.S. antitrust law reaches foreign conduct.
Section 1 of the Sherman Act,1 declares illegal every “contract, combination . . . or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.” Thus, by its own terms, the Sherman Act has extensive reach and would apply to any agreement that (unreasonably) restrains trade or commerce involving a foreign nation. To limit the reach of the Sherman Act, U.S. courts developed a set of guidelines to determine when, in fact, the Sherman Act reached foreign conduct.
In United States v. Aluminum Co. of America, Judge Learned Hand of the U.S. Court of Appeals for the Second Circuit fashioned an effects test to determine whether U.S. antitrust law applies to foreign conduct.2 Under the effects test, Judge Hand held, U.S. law would apply to foreign business activity (1) “intended to affect” U.S. commerce, and (2) “shown actually to have had some effect upon” U.S. commerce. Subsequent courts followed Judge Hand’s general guidance but disagreed significantly as to when the Sherman Act applied to foreign conduct. In response to this disagreement, Congress enacted the FTAIA in 1982.3
The FTAIA defines when U.S. antitrust law reaches foreign or international operations, purchases, and conduct. Thus, the FTAIA has special importance for companies that buy or sell goods or services outside the United States. For example, U.S. companies that purchase goods from foreign sellers may hold those sellers accountable under U.S. antitrust laws for anticompetitive practices, so whether the FTAIA bars U.S. antitrust claims would be relevant to those U.S. companies. Relatedly, foreign companies that sell goods or services knowing that those goods or services will be imported into the United States have an interest in knowing when and the extent to which U.S. law applies to those sales.
Courts often speak of the FTAIA in terms of whether it applies or not. That is because if the FTAIA applies, then it bars the application of the Sherman Act. By contrast, if the FTAIA does not apply, then the Sherman Act theoretically reaches the conduct at issue. Accordingly, courts will often analyze whether the FTAIA applies.
The FTAIA states a general principle—the Sherman Act does not apply to foreign trade or commerce—and then states the exceptions to that general principle. By its own terms, the FTAIA does not apply (and, thus, U.S. antitrust law may apply) in two cases:
The FTAIA’s Application to Import Commerce
The FTAIA does not apply to direct imports. For example, courts have held that the following activities involve U.S. imports:
Courts also consider who imported the products. For example, courts have often found no U.S. import when the plaintiff, as opposed to the defendant, imported the product into the United States.4
Practice Tip. Courts consider conduct to involve U.S. import commerce not only when the defendant physically imported the product into the United States, but also when the defendant’s conduct was directed at an import market, meaning that the conduct must target import goods or services.5 For example, where foreign travel agents sued airlines for an alleged fixing of commission rates paid to foreign travel agents, the conduct was not directed at an import market because the airlines’ alleged conduct targeted a foreign market, and any importing of the fixed rates into the United States occurred as a result of the plaintiff travel agents’ own activities and not the actions of the defendant airline companies.
The FTAIA’s Application to Non-import Commerce
The FTAIA does not bar Sherman Act claims based on foreign activity where that activity causes a direct, substantial, and reasonably foreseeable effect on U.S. commerce and the effect rises to the level of a Sherman Act claim. U.S. law applies to foreign conduct only when the conduct satisfies both conditions.
When Foreign Activity Has a Direct, Substantial, and Reasonably Foreseeable Effect
The first prong of the non-import commerce condition requires that the foreign activity have a (1) direct, (2) substantial, and (3) reasonably foreseeable effect.
Determining Whether the Foreign Activity Has a Direct Effect
Appellate courts disagree about what constitutes a direct effect. The U.S. Courts of Appeal for the Seventh and Second Circuits ask whether the “injury is within the reasonably proximate causal nexus of the anticompetitive behavior.”6
The Department of Justice’s Antitrust Division agrees with this approach.7 The U.S. Court of Appeals for the Ninth Circuit, on the other hand, asks whether the “immediate consequence of the anticompetitive behavior” caused the injury.8 The Ninth Circuit’s interpretation has been described as a stricter test because it requires a more direct causal connection than the Seventh and Second Circuits.9
Illustrations of these standards follow below:
Practice Tip. While commentators often discuss the difference between the two tests, as a practical matter the two tests will often reach similar outcomes because they both ultimately require a causal relationship between the defendant’s conduct and the plaintiff’s injury. Thus, even though the Ninth and Seventh Circuits reached apparently different results in *** Hsiung and Motorola Mobility, those results turned not on the “direct” prong of the FTAIA, but on whether the Illinois Brick rule bars civil (but not criminal) claims.14
Determining Whether the Foreign Activity Has a Substantial Effect
Absent compelling evidence that the foreign activity involved minimal commerce, courts will generally find that the foreign activity had a substantial effect on U.S. commerce.15
Practice Tip. Whether the foreign activity has a substantial effect is rarely an issue that affects a court’s determination of whether the FTAIA applies.
Determining Whether the Foreign Activity Has a Reasonably Foreseeable Effect
The reasonably foreseeable requirement incorporates an objective standard into the FTAIA. The test is “whether the alleged domestic effect would have been evident to a reasonable person making practical business judgments.”16
Practice Tip. Given the overlay with the direct prong, this factor is often not seriously discussed by courts.
Determining Whether the Effect Gives Rise to a Sherman Act Claim
The second prong of the non-import commerce condition requires that the effect rise to the level of a Sherman Act claim. If it does not rise to that level, then the FTAIA applies and bars the application of U.S. antitrust law.
The Supreme Court has held that the gives rise to prong prevents foreign purchasers from bringing a Sherman Act claim where the price-fixing activity is foreign but causes both injury in the United States and independent foreign injury.17 In that circumstance, the independent foreign harm rather than the domestic harm gives rise to the plaintiff’s claim. Only if the foreign harm from the price-fixing had given rise to a domestic injury could a plaintiff fit into the FTAIA domestic injury exception. Courts have found that the give rise to prong requires a showing of proximate causation, not just but-for causation.18 Notably, the parties that are injured in the United States by the same foreign price-fixing fit into the FTAIA exception and therefore may bring a Sherman Act claim.
Only personally incurred injuries give rise to Sherman Act claims. For example, Motorola claimed that its foreign subsidiaries bought anticompetitively priced LCD panels during an alleged price-fixing scheme. The subsidiaries integrated the panels into larger products and sold those products to Motorola in the United States. Motorola brought claims against the LCD manufacturers on behalf of its subsidiaries, but the FTAIA barred those claims. Though directly affected by the manufacturers’ actions, Motorola was an indirect purchaser, so the effect did not rise to the level of a Sherman Act claim.19
Practice Tip. Motorola’s status as an indirect purchaser constituted a standalone, related flaw under Illinois Brick that independently defeated Motorola’s claim. Direct purchasers pay increased prices on the immediate subjects of a cartel. Indirect purchasers buy goods from direct purchasers. Illinois Brick stands for the proposition that indirect purchasers generally have no standing under the Sherman Act—even if direct purchasers passed on their price increases to the indirect purchasers. As a result, the Motorola Mobility court held that Illinois Brick independently barred Motorola’s antitrust claims.20 Notably, the Department of Justice (DOJ) has taken the position that this judicial doctrine does not apply in criminal actions, which explains the difference between the results in Motorola and *** Hsuing.
FTAIA also bars claims brought by Motorola’s subsidiaries under U.S. antitrust law. The Seventh Circuit held that Motorola’s subsidiaries—as non-U.S. entities—had to seek relief under the laws of the countries where either they or the LCD manufacturers had incorporated.21 For a foreign plaintiff’s injury to give rise to a U.S. antitrust law claim, the injury must arise from conduct that directly affected U.S. commerce.22 As an example, foreign companies agreeing to boycott U.S. exports— reducing supply and in turn raising foreign prices—constitutes an acceptable chain of injury that would enable a foreign plaintiff to sue under U.S. antitrust law.
Practice Tip. As suggested by Motorola, the foreign subsidiary of a U.S. company will have difficulty bringing a claim for a foreign injury under U.S. antitrust law.
The DOJ may still pursue criminal enforcement actions against foreign companies when private plaintiffs may not otherwise pursue antitrust claims. As discussed above, in Motorola Mobility, the U.S. Court of Appeals for the Seventh Circuit found that Motorola was barred from bringing its civil claims because the defendants’ conduct did not give rise to an antitrust remedy for Motorola because of the Illinois Brick rule prohibiting claims by indirect purchasers. Judge Richard Posner, writing for the Seventh Circuit, observed, however, that the government could pursue criminal charges based on the same underlying conduct because there was no analog to the Illinois Brick rule in criminal proceedings. Indeed, Judge Posner acknowledged that the government’s charges in Motorola Mobility were appropriate because the government was not limited by Illinois Brick.23
The FTAIA also limits the scope of the FTC’s antitrust enforcement authority under Section 5 of the FTC Act, which prohibits unfair methods of competition. Thus, the limitations imposed by FTAIA on the Sherman Act apply similarly to the FTC’s enforcement authority under Section 5 of the FTC Act.24
Because the FTAIA regulates foreign conduct, courts often consider comity when applying it. Comity is the principle that nations or states respect one another’s sovereignty and laws. Courts may bar the application of U.S. antitrust law if, for example, its application would cause a foreign company to violate domestic law.25 Notably, U.S. courts assume that the U.S. government’s claims do not violate principles of comity.26
John Terzaken is a partner at Simpson Thacher & Bartlett LLP focusing on antitrust matters, including government enforcement of antitrust, fraud, and other white collar violations, as well as related follow-on civil litigation. Prior to joining Simpson Thacher, John held a leading position in the DOJ’s Antitrust Division as Director of Criminal Enforcement, where he oversaw the division’s criminal enforcement nationwide. His responsibilities included presiding over some of the largest global cartel investigations ever undertaken by the DOJ. Abram Ellis is a partner at Simpson Thacher focusing on antitrust matters, including class action litigation, antitrust merger review and antitrust counseling, and on regulatory issues present in international and cross-border transactions. He regularly represents clients in some of the most high-profile, pending private antitrust actions. He has also successfully helped clients navigate the antitrust merger review process and regularly consults and advises clients on potential business activities and strategies, new industry developments, and contracting activities. Jonathan Myers is an associate in the Washington, D.C. office of Simpson Thacher.
To find this article in Lexis Practice Advisor, follow this research path:
RESEARCH PATH: Antitrust > Civil Antitrust Litigation > Pleadings > Practice Notes
For background on the required effect on interstate commerce for domestic conduct, see
> EFFECT ON COMMERCE IN FEDERAL ANTITRUST CASES
For a discussion of the issue of whether an antitrust plaintiff has standing to sue, including a discussion of the antitrust injury doctrine, see
> STANDING IN ANTITRUST CASES
For an overview of considerations related to application of the Foreign Trade Antitrust Improvements Act (FTAIA), see
> FOREIGN TRADE ANTITRUST IMPROVEMENTS ACT (FTAIA) CHECKLIST
RESEARCH PATH: Antitrust > Civil Antitrust Litigation > Pleadings > Checklists
For basic information on antitrust law, see
> ANTITRUST LAW FUNDAMENTALS
RESEARCH PATH: Antitrust > Antitrust Fundamentals > Practice Notes
1. 15 U.S.C.S. § 1. 2. 148 F.2d 416 (2d Cir. 1945). 3. 15 U.S.C.S. § 6a. 4. See Kruman v. Christie’s Int’l PLC, 284 F.3d 384, 395 (2d Cir. 2002). 5. Animal Sci. Prods. v. China Minmetals Corp., 654 F.3d 462, 470 (3rd. Cir. 2011). 6. Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845, 856 (7th Cir. 2012); Lotes Co. v. Hon Hai Precision Indus., 753 F.3d 395 (2d Cir. 2014). 7. See Makan Delrahim, Drawing the Boundaries of the Sherman Act: Recent Developments in the Application of the Antitrust Laws to Foreign Conduct, 61 N.Y.U. Ann. Surv. Am. L. 415, 430 (2005). 8. United States v. LSL Biotech., 379 F.3d 672, 680 (9th Cir. 2004). 9. Minn-Chem, 683 F.3d at 857. 10. See Minn-Chem, 683 F.3d at 859. 11. See Motorola Mobility LLC v. AU Optronics Corp., 775 F.3d 816, 819 (7th Cir. 2015). 12. See LSL Biotech., 379 F.3d at 681. 13. See United States v. *** Hsiung, 778 F.3d 738, 759 (9th Cir. 2015). 14. Ill. Brick Co. v. Illinois, 431 U.S. 720 (1977). 15. Compare Minn-Chem, 683 F.3d at 856 (finding the sale of 5.3 million tons of potash to be substantial) with United Phosphorus, Ltd. v. Angus Chem. Co., 131 F. Supp. 2d 1003, 1012 (N.D. Ill. 2001), aff’d, 322 F.3d 942 (7th Cir. 2003) (finding the sale of only 500 grams of a chemical not substantial). 16. Animal Sci. Prod., 654 F.3d at 471 (3d Cir. 2011). 17. See F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155, 158–59 (2004). 18. See, e.g., Empagran S.A. v. F. Hoffmann-LaRoche, Ltd., 417 F.3d 1267 (D.C. Cir. 2005); In re Dynamic Random Access Memory (DRAM) Antitrust Litig. v. Micron Tech., Inc., 546 F.3d 981, 987 (9th Cir. 2008); In re Monosodium Glutamate Antitrust Litig. Inquivosa SA v. Ajinomoto Co., 477 F.3d 535, 538 (8th Cir. 2007). 19. Motorola Mobility, 775 F.3d at 820. 20. Motorola Mobility, 775 F.3d at 823. 21. Motorola Mobility, 775 F.3d at 820. 22. F. Hoffmann-La Roche, 542 U.S.at 164. 23. See Motorola Mobility, 775 F.3d at 825. 24. 15 U.S.C.S. § 45(a)(3). 25. See Hartford Fire Ins. Co. v. California, 509 U.S. 764, 798 (1993). U.S. courts determine for themselves, though, whether such a conflict exists. See Animal Sci. Prod., Inc. v. Hebei Welcome Pharm. Co., 138 S. Ct. 1865, 1870 (2018) (finding that the Chinese government’s interpretation of Chinese law is not dispositive for determining whether Chinese law compelled Chinese manufacturers’ price-fixing). 26. F. Hoffmann-La Roche, 542 U.S. at 171.