Importing Plaintiffs: The Extraterritorial Scope of the Sherman Act After Empagran

Author:Lacey M. Donovan
Position:J.D. Candidate, The University of Iowa College of Law
Pages:06

Lacey M. Donovan: J.D. Candidate, The University of Iowa College of Law, 2006; B.B.A., Loyola University Chicago, 2002. I would like to thank my parents and Weiser for their love and support. This Note is dedicated in loving memory of my grandfather, Timothy D. Donovan (1913-2005), who inspired me to work hard and love life. Page 721

I Introduction

Pete, a European manufacturer, purchases raw materials from a multinational corporation. Pete later learns that he overpaid for the materials because of higher prices set by an international price-fixing cartel.1International cartels increase prices above normal competitive levels for many purchasers such as Pete, effectively transferring funds from consumers to the cartel and decreasing economic efficiency.2 Such action creates major costs for American consumers3 and violates American antitrust law.4Purchasers in the United States also suffer from the same cartel as Pete, but the American purchasers have an opportunity to file suit against the cartel in the American court system and potentially recover treble damages-three times the actual injuries suffered.5 Because Pete will not receive such a generous remedy in his country, he decides to file a complaint in the United States under the Sherman Act.6

American courts initially assess cases like Pete's by determining whether the court has subject matter jurisdiction over his claim. Subject matter jurisdiction refers to the assertion of jurisdiction over certain activities or "conduct sought to be regulated."7 Common law tests and later the Foreign Page 722 Trade Antitrust Improvements Act ("FTAIA")8 established methods to determine when an antitrust injury occurring across state boundaries constitutes a cause of action in American courts. Foreign plaintiffs, finding greater incentives to file complaints in American courts, continue to argue that the Sherman Act9 applies to all conduct violating the Act and not just direct injuries to American commerce.

The number of foreign plaintiffs suffering antitrust injuries and suing in American courts continues to grow. Increased globalization10 creates greater opportunities for international cartel behavior11 and greater challenges for the United States in policing such cartels.12 In an effort to effectively break up these price-fixing cartels, the United States regulates cartel activity through both criminal and civil enforcement actions.13 The Page 723 problem with penalizing international cartel activity within the United States is that much of the cartel's activity occurs outside the United States. While the United States has the power to regulate its own market, an international cartel operates under an expansive market that recognizes no national boundaries. Therefore, antitrust enforcement in one market does little to deter activity conducted throughout many markets with varying regulatory policies.14

With this problem in mind, many who believe that the purpose of the Sherman Act is to deter cartel activity argue that the United States should broaden the scope of the Sherman Act to inflict more high-dollar damages upon the international cartels. Encouraging such an expansive approach, the economic imperialists15 argue that the only way to effectively hinder an international price-fixing cartel is to enforce the best economic policy, i.e., the Sherman Act, worldwide.16

In contrast to the economic imperialist argument, American courts face questions as to when the respect of foreign sovereigns and the need for predictability override deterrence interests. Extraterritorial17 application of American antitrust law risks infringement on the sovereignty of other states.18 A state addressing global cartel activity that is also within the jurisdiction of the United States no longer has the freedom to develop its own remedies for antitrust violations, but must create a forum to compete with the treble damages in American courts.19 In addition, an expansive jurisdictional approach creates unpredictability for the international business community20 and hinders criminal prosecutions of antitrust violations in the United States.21 Therefore, advocates of narrowing subject Page 724 matter jurisdiction in American courts argue that the law should only apply to situations that traditionally fall within the Sherman Act's scope.22

The Supreme Court's ruling in F. Hoffmann-LaRoche, Ltd. v. Empagran S.A.23 rejects the economic imperialist theory and imposes limits on a foreign plaintiff's ability to sue in the United States. However, the ruling leaves open the opportunity for foreign-plaintiff actions if such a plaintiff can prove any causal relationship between the foreign plaintiff's actual injury and the domestic effects on American commerce.24 Lower courts addressing a foreign plaintiff's action after this Supreme Court ruling should acknowledge the dicta emphasizing respect of foreign sovereignty when deciding how far to extend subject matter jurisdiction outside American borders.

This Note provides an overview of standards and policies used to determine subject matter jurisdiction over foreign plaintiffs. Part II focuses on traditional common law tests that provided factors establishing subject matter jurisdiction,25 while Part III describes the Foreign Trade Antitrust Improvements Act ("FTAIA").26 Part IV then explains the Supreme Court's Empagran ruling and the resulting alterations to the traditional tests.27 Part V provides a breakdown of the interests in limiting subject matter jurisdiction,28 while Part v. explains the argument in favor of expanding subject matter jurisdiction to effectively deter cartel activity.29 Finally, Part VII proposes an alternative test to determine subject matter jurisdiction tailored to protect the sovereignty of foreign states without sacrificing deterrence interests in the long-term future. Page 725

II Common Law Tests To Establish Subject Matter Jurisdiction

For years, federal courts have contemplated when American antitrust law should regulate international conspiracies to restrain trade.30 Courts have historically balanced desires to deter anticompetitive behavior with desires to respect the sovereignty of other states. Decisions often varied depending on which of the two desires was of greater importance at a particular time.31 While courts have not hesitated to apply antitrust laws extraterritorially, they have repeatedly altered the test and the factors used to determine when a court has subject matter jurisdiction over a foreign plaintiff in antitrust cases.32

A The Place Of Conduct Test

When addressing foreign restraints on trade, the Supreme Court initially took a strict, geographically focused stance. In American Banana Co. v. United Fruit Co.,33 the Supreme Court held that the Sherman Act does not apply to conduct occurring outside of the United States when the injury is also outside of the United States.34 The Court further commented that a conspiracy to restrain trade designed in the United States, but executed in a foreign country, is only subject to the local laws of that foreign country.35Fostering a respect for foreign sovereignty, this test provided that all determinations of unlawfulness must be decided by the state within which the act was committed.36 The American Banana ruling, however, assumed that the injury occurred in the same state as the conduct. Page 726

B The Effects Test

American Banana was later distinguished on its facts. In United States v. American Tobacco Co., the Supreme Court determined that even a conspiracy created in England would make foreign companies subject to American jurisdiction if the purpose of the conspiracy was to facilitate acts forbidden by the Sherman Act.37 Therefore, the place of the conduct mattered little compared to the proposed location of the anticompetitive effects.

Over time, the courts continued to recognize that conduct in violation of American antitrust laws occurring outside the United States might still have harmful consequences beyond the place of the conduct, justifying the assertion of subject matter jurisdiction within the United States.38 Thus, in Continental Ore Co. v. Union Carbide & Carbon Corp., the Supreme Court agreed that "[a] conspiracy to monopolize or restrain the domestic or foreign commerce of the United States is not outside the reach of the Sherman Act just because part of the conduct complained of occurs in foreign countries."39

Lower courts, however, did limit the scope of the Sherman Act in extraterritorial activity. One such limitation originated in United States v. Aluminum Co. of America (Alcoa), and provided that a court has subject matter jurisdiction over a foreign plaintiff only if the plaintiff satisfies the "effects" test.40 Judge Learned Hand's effects test had two requirements. First, there must be an intent to affect the commerce of the United States, and second, there must be an actual effect on the commerce of the United States.41

As more courts adopted the effects test,42 confusion arose as to...

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