Is there a dormant extraterritoriality principle? Commerce clause limits on state antitrust laws.

• Author: Ruttinger, Michael J.

State antitrust laws ordinarily supplement federal law by providing a cause of action for anticompetitive activity that occurs in the state. Some states, however, have construed their antitrust regimes to reach conduct that occurs outside the state's boundaries. Such regulation raises significant federalism and Commerce Clause concerns by creating possible extraterritorial liability for conduct with virtually no in-state effect. This Note examines two Commerce Clause standards that may limit the degree to which state antitrust laws may exercise extraterritorial force--the "dormant" or "negative" Commerce Clause and the so-called "Extraterritorial Principle." Unfortunately, the dormant Commerce Clause test, as articulated in Pike v. Bruce Church, Inc., is an overly malleable and ineffective limit. In contrast, the Extraterritoriality Principle is a powerful per se restraint; however, the Supreme Court has not provided clear guidance for when to apply the rule. Accordingly, this Note advocates an "Inconsistency Principle" as the best way to understand the Court's concern with extraterritorial regulation. State antitrust laws should not have extraterritorial force when they would impose inconsistent legal obligations on the out-of-state defendant.

TABLE OF CONTENTS INTRODUCTION I. THE MODERN "DORMANT" COMMERCE CLAUSE BALANCING TEST A. Development of Modern "Dormant" Commerce Clause Doctrine B. The Pike Test Fails to Effectively Restrain Extraterritorially Enforced State Antitrust Laws II. THE "EXTRATERRITORIALITY PRINCIPLE" A. Development of the Extraterritoriality Principle B. The Extraterritoriality Principle Fails to Effectively Restrain State Antitrust Laws III. THE "INCONSISTENCY PRINCIPLE" AS A RESTRAINT ON STATE ANTITRUST LAWS CONCLUSION INTRODUCTION

Antitrust law provides broad remedies for many kinds of anticompetitive conduct, and plaintiffs frequently turn to federal antitrust statutes to attack obstacles to fair competition. Federal law, however, has never been the sole source of relief. Prior to the adoption of the Sherman Antitrust Act in 1890, (1) state laws offered the exclusive remedy for restraints on trade. Even now neither state nor federal regimes operate wholly independent of each other. (2) Rather, the laws supplement one another as part of a two-tier enforcement scheme in which the federal laws are meant to complement, not replace, state laws. (3) This scheme generally works well, allowing plaintiffs to reach broad, interstate monopolies under federal law while using the laws of their home state to address in-state price-fixing.

The beginnings of a dangerous trend have emerged among state courts in recent years, threatening to destabilize the long and harmonious relationship between federal and state antitrust regimes. Judges are increasingly willing to ascribe extraterritorial reach to state antitrust laws, (4) permitting plaintiffs who would otherwise sue out-of-state corporations under the Sherman Act to forum shop and reach these defendants within the comfort of a more favorable state forum. Although state laws often reach some out-of-state activity, (5) these claims become problematic and raise alarming federalism and Commerce Clause concerns when they create extraterritorial liability for conduct that occurred predominantly out-of-state and had very little, if any, in-state effect. For instance, the Harmar Bottling Company recently sued the Coca-Cola Company alleging monopolistic practices. (6) Although the suit could have been brought as a Sherman Act action, Harmar instead relied on the Texas Free Enterprise and Antitrust Act of 1983 to claim damages for anticompetitive conduct negotiated and implemented in three states other than Texas. (7) Moreover, applying Texas law in a Texas forum to conduct occurring in four different states was not the most disturbing aspect of the case; the challenged agreements between soft drink bottlers and retailers, which governed the advertising, display, and sale of products, were legal under the antitrust laws of the three other states. (8)

The Harmar decision is not an aberration; it is one of the more salient examples of a trend broadening state antitrust jurisdiction. Although the Texas Supreme Court overturned the jury's $15.6 million dollar verdict, (9) other courts continue to expand the reach and potency of their states' statutes. For instance, the California Supreme Court has refused to reconsider at least one case applying the state's Cartwright Antitrust Act to allegedly anti-competitive conduct involving no in-state defendants or alleged in-state activity. (10) The Court of Appeals in RLH Industries, Inc. v. SBC Communications, Inc. held that the act could apply to wholly out-of-state conduct. (11) The plaintiffs in RLH alleged that SBC impermissibly required its clients to use SBC-provided high voltage equipment of the same kind produced and marketed by RLH, thus diminishing its ability to sell the product. Like the court in Harmar, the RLH court failed to recognize that SBC's conduct was legal in those other states. Unlike Harmar, however, the RLH decision demonstrated an even more worrisome side effect of extraterritorially applied antitrust laws because the arrangements in these other states were mandated by SBC's filed tariffs, each operating with the force of law. Accordingly, anything short of the very conduct RLH complained of would have exposed SBC to liability for violating its tariffs in each state. (12)

Harmar and RLH are two examples of a problem that has the potential to spiral out of control if more states apply their powerful antitrust remedies to transactions already governed by another state's laws. Professor Hovenkamp has observed that this danger is particularly high in the case of indirect-purchaser remedies provided by many antitrust statutes. (13) These laws are state-created remedies that undermine the Supreme Court's decision in Illinois Brick Co. v. Illinois, which held that only the "direct purchaser," often a middleman or retailer, could sue a product manufacturer for a price-fixing arrangement. (14) Many states responded to the ruling by enacting their own indirect-purchaser laws, which give individual consumers a cause of action that they lack under federal law. (15) Aggressive extraterritorial application of these remedies could cause major downstream problems because their application on a national scale may cause defendants to unfairly pay treble damages on multiple occasions for the same price-fixing transaction. (16) Moreover, while federal law at least permits these defendants to have their case tried in federal court, defendants sued under extraterritorially enforced laws can be reached in the courts of a state in which they have no business presence, limited only by the enacting state's ability to obtain personal jurisdiction. (17)

The Constitution has historically enforced territorial limits on the states and prohibited states from exporting their laws across state lines. (18) The Commerce Clause context is unique, however, because territorial limits have retained their vitality. (19) Thus, although states may apply their own antitrust regimes to out-of-state conduct, the alleged violation must have "a sufficient effect within the state." (20) As a result, the Commerce Clause theoretically precludes any state from enforcing its law extraterritorially where the allegedly unlawful conduct had no in-state effect or where enforcement would impede "the free flow of trade between States. "(21)

Behind the Court's deceptively simple antagonism towards extraterritorial legislation lurk two arcane doctrines used interchangeably despite a very real potential to contradict each other. The first, and older, of these rules is located in the "dormant" Commerce Clause and uses an ill-defined balancing test to assess statutes that regulate "even-handedly," and as such impose incidental burdens on interstate commerce. (22) This deferential standard, well-known as the Pike balancing test, invalidates a statute only when the burden imposed is "clearly excessive" compared to the regulating state's interests. (23) In stark contrast, the second rule--also described as part of the dormant Commerce Clause (24)--provides a bright-line alternative. This so-called "Extraterritoriality Principle" embodies the simple proposition that states may not legislate extraterritorially; (25) it establishes a per se bar against state laws regulating commerce occurring "'wholly outside of the State's borders.' " (26) A problem immediately becomes obvious. By forcing two doctrines that take opposite approaches to analyzing the validity of a law into the rubric of the dormant Commerce Clause, (27) courts "subject[] state initiatives that reach beyond a state's borders to a constitutional doctrine that rests on an unstable legal foundation." (28)

The Pike balancing test and the Extraterritoriality Principle are distinct standards that create an apparently intractable conflict when they overlap, yet the Supreme Court has provided no meaningful guidance on when each standard applies. (29) Accordingly, judges cannot discern which rule to apply to statutes that are facially neutral, regulate evenhandedly, but incidentally create liability for out-of-state conduct. To the extent the Court has addressed such situations--in CTS Corp. v. Dynamics Corp. of America, (30) for instance--its opinions have only contributed to the doctrinal confusion. The CTS Court examined an Indiana antitakeover law that protected in-state companies from out-of-state control by requiring outside buyers to receive approval from a majority of shareholders before obtaining voting rights. (31) Although the CTS Court upheld the statute, it remained unclear about which test applied. Instead, the Court added yet another condition to the mix, observing that the Commerce Clause prohibits laws that "adversely affect interstate commerce by subjecting activities to...