The Ftaia Limits the Extraterritorial Reach of State Antitrust Laws

• Publication year: 2014
• Author: By Dominique-Chantale Alepin and Jonathan Guss

THE FTAIA LIMITS THE EXTRATERRITORIAL REACH OF STATE ANTITRUST LAWS

By Dominique-Chantale Alepin¹ and Jonathan Guss²

I. INTRODUCTION

The importance of foreign trade of material and industrial goods to the United States economy cannot be overstated. In 2013, total U.S. trade with foreign countries (goods and services) was $5.02 trillion.³ Goods are the most important piece of foreign commerce: in 2013, they accounted for more than 80% of all U.S. imports ($2.263 trillion) and 66% of U.S. exports ($1.5 trillion).⁴

Labels like "Made in America" and "Made in China" belie the complex international networks of production underlying many products. "Nothing is more common nowadays than for the products imported to the United States to include components that producers had bought from foreign manufacturers."⁵ Take the average smartphone: a device may be assembled in China using parts from multiple suppliers manufactured on several different continents.⁶ As modern manufacturing has become increasingly globalized, the production of goods has been fragmented across the globe and dispersed among many different companies.

Whether and how much the U.S. antitrust laws should touch the complex, globalized production of goods is an important issue that affects foreign and U.S. companies alike. U.S. competition law can have a meaningful impact on imports to, and exports from, the United States as well as the extraterritorial production of goods. Policies that raise import barriers in the United States may increase costs for foreign producers, but they also have a parallel effect on U.S. multinational companies with foreign manufacturing operations.

Three decades ago, Congress passed the Federal Trade Antitrust Improvement Act ("FTAIA") to provide clearer guidance on what foreign conduct could be tried in the United States. The FTAIA sets consistent boundaries on the extraterritorial reach of U.S. antitrust laws; it requires that to implicate liability under U.S. law, the conduct must have had direct effects on U.S. commerce.⁷ This limit serves an important role in ensuring that U.S. competition law does not reach too far into foreign affairs. As the Supreme Court has recognized, the foreign application of U.S. law "creates serious risk of interference with a foreign nation's ability independently to regulate its own commercial affairs."⁸ It can also create friction and "resentmen[t at] the apparent effort of the United States to act as the world's competition police officer."⁹

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In recent years, indirect purchasers have been trying to get around the limitations imposed by the FTAIA by using state antitrust laws to sue foreign manufacturers for conduct that has an indirect effect on U.S. commerce. Courts that have encountered these claims have rejected them.¹⁰ Courts should continue to block these efforts. Foreign commerce "is preeminently a matter of national concern," over which the federal government has exclusive power of regulation.¹¹ With respect to foreign commerce, "the need for uniformity" of the U.S.'s policies is "essential."¹² "In international relations and with respect to foreign intercourse and trade the people of the United States act through a single government with unified and adequate national power."¹³ The application of state antitrust laws to foreign conduct outside the reach of federal antitrust laws is no exception.

Given the importance placed on uniformity in the area of foreign commerce, courts must maintain the consistent boundaries imposed by the FTAIA and block efforts to undermine federal policy through the use of state antitrust laws. Subjecting foreign manufacturers to a patchwork of state antitrust laws for conduct that has no direct effects in the United States undercuts the ability of the federal government to regulate foreign commerce and creates unnecessary uncertainty in business transactions. Allowing state laws to reach further than the FTAIA will deny "businessmen, attorneys, and judges as well as our trading partners" a "clear benchmark" as to liability for antitrust violations in the United States.¹⁴ It also ensures that the federal government can "continue[] to speak with a single, unified voice" over foreign commerce which is "pre-eminently a matter of national concern."¹⁵ By enforcing consistent boundaries for state and federal antitrust law and ensuring that only one body speaks on foreign trade, the United States can reduce friction with trading partners and continue to increase its stature in the global marketplace.¹⁶

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II. FOREIGN COMMERCE IS AN AREA OF EXCLUSIVE FEDERAL JURISDICTION

The Commerce Clause gives Congress exclusive power over commerce with foreign countries.¹⁷ The commerce clause of the Constitution provides Congress the power "[t]o regulate Commerce with foreign Nations."¹⁸ This clause has given rise to the dormant commerce clause, which is the negative — or dormant — corollary to the commerce power. It is negative in that it implicitly limits states' power in interstate and foreign commerce.¹⁹ Article I, Section 8 reflects a desire by the Framers of the Constitution to ensure uniform regulation of foreign commerce and consistent regulation of foreign affairs by one body.²⁰ Congress' exclusive jurisdiction derives from the principle that "[f]oreign commerce is pre-eminently a matter of national concern."²¹ Exclusive policy making by one body is important to ensuring that the federal government can "speak with one voice when regulating commercial relations with foreign governments."²² State laws must be consistent with federal law and policy in their effect on foreign commerce. So if a state law implicates foreign commerce, courts must examine the regulation to determine whether it "may impair uniformity in an area where federal uniformity is essential."²³ State laws that are not consistent with federal law and policy as to foreign commerce violate the Commerce Clause. ²⁴

III. CONGRESS INTENDED TO ESTABLISH A CONSISTENT STANDARD FOR THE EXTRATERRITORIAL REACH OF ANTITRUST LAWS BY PASSING THE FTAIA

The Sherman Act explicitly prohibits acts unreasonably restraining trade in the course of "commerce among the several States, or with foreign nations."²⁵ However, what Congress meant by "commerce with foreign nations" was not entirely clear. This ambiguity created inconsistent legal decisions in different parts of the country in civil, government, and criminal cases.²⁶ Prior to the enactment of the FTAIA, there was "disparity among judicial interpretations and between those interpretations and executive enforcement policy regarding the quantum and nature of the effects required to create jurisdiction."²⁷

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In 1982, Congress enacted the FTAIA to establish clear boundaries for the extraterritorial reach of the Sherman Act.²⁸ The House Judiciary Report reflects that one of the major concerns Congress sought to address with the FTAIA was the ambiguity in the legal test used to determine whether American antitrust laws applied to foreign transactions.²⁹ Congress was concerned that inconsistency as to whether foreign conduct could be tried in the United States had made "American antitrust law an unnecessarily complicating factor in a fluid environment in which prompt decisionmaking may be critical."³⁰ Congress wanted to create a "single, clear standard" which would "reduce the amount of legal research and analysis that will be necessary to make an accurate prediction as to whether United States antitrust laws 'indicate problems.'"³¹ The consistent application of one standard was intended to free companies "from the possibility of dual and conflicting antitrust regulation."³²

Congress struck a delicate balance with the FTAIA, weighing the interests of U.S. consumers against the unnecessary interference in foreign affairs. The FTAIA established that the Sherman Act is applicable to conduct that involves foreign commerce, but that conduct must have a "direct, substantial, and reasonably foreseeable effect" on commerce within the United States.³³

In recent years, indirect purchaser plaintiffs have tried to evade the FTAIA requirement of "direct, substantial, and reasonably foreseeable effect[s]" by filing claims under state antitrust laws to reach conduct beyond the purview of the federal antitrust laws.³⁴ Given the growing amount of litigation attempting to apply California (and other state) law to foreign conduct, it is important that there be clarity and consistency that California law reach no further than the FTAIA permits for federal antitrust law.

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IV. CONSTITUTIONAL PRINCIPLES CLEARLY LIMIT THE REACH OF CALIFORNIA'S CARTWRIGHT ACT AND UNFAIR COMPETITION LAW

The FTAIA clearly bars plaintiffs from reaching foreign transactions that have no "direct, substantial and reasonably foreseeable effect" under the Sherman Act. If California law is allowed to reach those same transactions, Congress cannot speak with "one voice" as to antitrust liability for foreign conduct and the FTAIA's goal of setting a "benchmark" for businessmen, attorneys, judges and trading partners will be obstructed.

A growing number of federal and state courts have agreed that state law cannot exceed the boundaries imposed by the FTAIA.³⁵ Those courts have correctly concluded that that principles of federalism including the commerce clause, supremacy clause, comity, and statutory construction support the conclusion that state law must not create a standard different from the FTAIA regarding foreign conduct.

A. California Law Must Comport with the FTAIA or Run Afoul of the Commerce Clause

The purpose of the foreign commerce clause is "to promote uniformity and to allow the federal government to set an appropriate uniform...