State Interest as the Main Impetus for U.s. Antitrust Extraterritorial Jurisdiction: Restraint Through Prescriptive Comity

• Jurisdiction: United States,Federal
• Citation: Vol. 31 No. 3
• Publication year: 2017

State Interest as the Main Impetus for U.S. Antitrust Extraterritorial Jurisdiction: Restraint Through Prescriptive Comity

Daniel Lim

STATE INTEREST AS THE MAIN IMPETUS FOR U.S. ANTITRUST EXTRATERRITORIAL JURISDICTION: RESTRAINT THROUGH PRESCRIPTIVE COMITY

ABSTRACT

The twenty-first century saw a rapid surge in competition law legislation and enforcement, resulting in higher fines and penalties, some ranging in the billions. Enforcement of competition law by various governments increased and cooperation between those governments resulted in the normalization of competition law enforcement and higher fines and penalties. Beginning with the United States, many states began to actively seek extraterritorial application of domestic competition laws against foreign entities. Though this may have a deterrent effect against anti-competitive conduct, it also has negative implications for smaller economies that lack the motive and ability to enforce competition laws. Most, if not all, of the top enforcers of competition laws had a point in time when their domestic companies could grow with little to no impediments from strong competition laws. Today, with the normalization of competition law, smaller economies are given less opportunities to grow in a similar environment with little to no competition laws. This Comment argues that although competition law carries with it a strong moral undertone with certain compelling socio-economic policies, competition law was formed and developed according to strong domestic economic interests. These interests do not take into consideration the interests of smaller economies that might fare better with less competition law enforcement. Although the U.S. government did try to narrow the extraterritorial application of U.S. competition law, those attempts were mostly superficial. This Comment proposes that the U.S. Courts, Congress, and competition authorities revisit the principle of international comity laid out by Justice Scalia's dissent in Timberlane Lumber Co. v. Bank of America, N.T. and S.A. to prevent competition law from becoming a protectionist tool that protects its domestic interests at the expense of the economic growth of smaller economies.

Introduction

Extraterritorial application of U.S. antitrust laws has been one of the most controversial issues in the debate concerning competition laws. Meanwhile, the

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extraterritorial reach of U.S. antitrust laws, along with those of the European Union, Canada, South Korea, and Japan has continued to increase. In 2006, a Samsung Electronics Company executive from Korea agreed to plead guilty to price-fixing conspiracy, serve jail time in the United States, and pay fines.¹ Furthermore, 2015 marked a major event in the history of antitrust extraterritorial jurisdiction: the U.S. Department of Justice secured the extradition of an Italian citizen from Germany for antitrust charges.² This was the first time a foreign citizen was extradited to the United States solely for violating the Sherman Antitrust Act, and the U.S. government praised the extradition as a result of effective international cooperation for a common cause of justice.³

Legal terms such as "conspiracy" and "fraud" give competition antitrust laws a strong moral undertone. However, competition laws throughout the world, including those of the United States, carry strong economic policies that preserve the interests of the state.⁴ These policies have negative potential implications for weaker and smaller states, which have fewer incentives and less ability to enforce antitrust laws within and beyond their domestic borders.⁵

This Comment will attempt to substantiate these implications by showing that the increasing extraterritorial application of competition laws is motivated mainly by state economic interests. Part I will discuss the development of U.S. antitrust extraterritorial jurisdiction. Part II of this Comment will discuss how other states began to imitate the American model of extraterritorial jurisdiction and how they entered into cooperative agreements to enforce these laws. Part III will show that cooperation between states was motivated largely by state economic interests and limited to developed states, and that smaller states and/or less developed states are at a great disadvantage under these global antitrust regimes. Part IV discusses the negative implications that extraterritorial application of antitrust laws has on smaller and developing economies, and further explores the issue through a case study of Korean antitrust law. Finally, Part V will attempt to provide a solution using the

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"prescriptive comity" principles laid out by Justice Scalia in his dissent in Timberlane Lumber Co. v. Bank of America, N.T. and S.A.

I. From Restraint of Extraterritorial Application to Extraterritorial Criminal Prosecution⁶

The united states was not always aggressive in its application of competition laws against foreign entities.⁷ As discussed below, before 1945, U.S. courts used the strict territoriality approach to limit U.S. antitrust law application to domestic jurisdictions.⁸ However, following World War II, U.S. courts developed a more liberal approach—the intended effects test.⁹ This new test soon met much opposition, and the U.S. courts retreated from the intended effects test by applying international comity principles.¹⁰ This restraint was short-lived, however; the courts quickly adopted the substantial effects test, which is still used today.¹¹ Every time the U.S. courts developed a more liberal test for broader extraterritorial application, there were important historical and political developments in the background.¹² This part discusses these legal developments and puts them in the context of the historical and political developments at that time.

A. American Banana: Strict Territoriality Test

In American Banana Co. v. United Fruit Co., Justice Holmes refused to apply the Sherman Act to conduct that occurred entirely outside of the United States.¹³ The defendant was a New Jersey corporation in the banana industry.¹⁴

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The Court found that the defendant was involved in various anticompetitive conduct with the intent to prevent competition and monopolize the banana trade.¹⁵ The defendant had purchased the business of several competitors with provisions against resuming trade and had contracted with other banana businesses to regulate prices and acquire controlling amounts of stock.¹⁶ It even created a selling company that sold bananas at fixed prices.¹⁷ After the plaintiff operated a banana plantation in Panama and built a railway in Colombia, the defendant instigated the Costa Rica authorities to take over the plantation and the railroad.¹⁸ Then, a third party received an ex parte order from a Costa Rican court declaring him as the owner of the plantation, and the defendant purchased the plantation from the third party.¹⁹ As a result, the plaintiff was driven out of business.²⁰ The plaintiffs alleged that the defendant's acts not only affected its plantation operations and supplies but also drove purchasers out of the market.²¹ It could thus be argued that the primary effects of the defendant's conduct were felt in the U.S. market, and that, therefore, the Sherman Act applied in that case.

Despite these actions that clearly violated the Sherman Act, Justice Holmes applied what was later called the strict territoriality approach.²² Calling it "the general and almost universal rule," he explained that the legislation was prima facie territorial.²³ In other words, the operation and effect of a statute was to be restricted to the territorial limits over which the lawmaker had legitimate power.²⁴

One might wonder why the Supreme Court did not rule against this egregious conduct that clearly violated the Sherman Act. At that point in time, however, it seems that the Supreme Court was concerned that applying its own standards on other foreign states would interfere with the sovereignty of other nations.²⁵

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B. Alcoa: Intended Effects Test

Holmes' strict territoriality approach did not survive the changing tides of world politics following World War II. In 1945, Judge Learned Hand in the Second Circuit Court of Appeals applied what was called the intended effects test in United States v. Aluminum Co. of America (Alcoa).²⁶ In Alcoa, Aluminum Co. of America (Alcoa), a U.S. corporation, and Aluminum Limited, a Canadian corporation formed to "take over those properties of 'Alcoa' which were outside the United States,"²⁷ were involved in a price-fixing and market division agreement, which Alliance, a Swiss corporation, executed.²⁸ Because the alleged conduct occurred outside of the United States, the court had to answer the question of whether, with the Sherman Act, "Congress intended to impose the liability [for such acts], and whether [the U.S.] Constitution permitted it to do so."²⁹

Judge Learned Hand held that Aluminum Limited's conduct fell within the purview of the Sherman Act. Citing to American Banana, he recognized that the scope of U.S. laws was not unlimited.³⁰ However, he held that U.S. laws could reach conduct outside the United States by foreign persons if the conduct had consequences within the United States that were forbidden by its laws.³¹ The intended effects test was that the Sherman Act applied to conduct outside the United States by foreign persons if (1) the person intended to affect U.S. imports and (2) such conduct had prohibited effects in the United States.³² The threshold to satisfy this intended effects test was not very high, especially for the prohibited effects requirement.³³ When discussing the actual effects of the

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prohibited conduct, Judge Learned Hand held that the burden was met even without proof that prices were affected.³⁴

C. From American Banana to Alcoa: A Historical Perspective

This substantial change in law was not completely independent of the socio-political...