The Ftaia's "domestic Effects" Exception: Why the Ninth Circuit Got it Right

JurisdictionUnited States,Federal
AuthorBy Stephen McIntyre
Publication year2020
CitationVol. 30 No. 2

By Stephen McIntyre1

Four decades ago, Congress took on a deceptively simple task: deciding when U.S. antitrust laws apply to conduct that occurs in foreign nations. The question was not a new one; the Supreme Court had grappled with it at least as early as 1909.2 But it was a question that had evaded clear and consistent answers, despite having cropped up repeatedly in the 90 years since the Sherman Act's passage. And so Congress stepped in to settle the matter once and for all.

The resulting legislation was called the Foreign Trade Antitrust Improvements Act, or the "FTAIA." The FTAIA said that conduct involving foreign trade or commerce is not subject to the Sherman Act unless one of two conditions were met. First, if the conduct involves imports to the United States, it remains within the Sherman Act's reach. Alternatively, if the conduct has a "direct, substantial, and reasonably foreseeable effect" on domestic commerce, and that effect "gives rise to a claim," the Sherman Act applies. Simple enough, right?

Not so much. As courts and litigants struggled to decipher the FTAIA, disagreements arose. The so-called "domestic effects" exception—the provision saying that foreign conduct is actionable if it has a direct, substantial, and reasonably foreseeable effect on U.S. commerce—has been a subject of psarticularly heated litigation and debate. In fact, the courts cannot even agree on what makes an effect "direct."

Hence this article. The Ninth Circuit, the first Court of Appeals to step into the thicket, holds that an effect is "direct" if it follows as an "immediate consequence" of the foreign conduct. The Second and Seventh Circuits disagree; they both hold that there need only be a "reasonably proximate causal nexus" between the conduct and the effect. Who is right?

This article argues that the Ninth Circuit has adopted the correct approach. The "immediate consequence" rule is not only truer to the FTAIA's statutory text, but also more consistent with how a similar provision in the Foreign Sovereign Immunity Act— another law dealing with the extraterritorial application of U.S. law—is construed. The "reasonably proximate causal nexus" rule, in contrast, derives from irrelevant doctrinal principles and creates a risk of doctrinal confusion.

This circuit split has persisted for nearly a decade. It is time to resolve it—and time to embrace the Ninth Circuit's interpretation as controlling.

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Congress passed the Foreign Trade Antitrust Improvements Act in 1982. According to the legislative history, one of the Act's chief purposes was to resolve disagreement among the lower courts concerning "the proper test for determining whether United States antitrust jurisdiction over international transactions exists," and to enact a "single, objective test—the 'direct, substantial, and reasonably foreseeable effect' test."3

Despite Congress's characterization of this standard as a "straightforward clarification" of American antitrust law,4 the resulting statute has accurately but diplomatically been described as "inelegant."5 As the Supreme Court explained in 2004 in F. Hoffmann-La Roche Ltd. v. Empagran S.A.,6 still the only case in which the High Court has construed the FTAIA, the statute sets forth a "general rule placing all (nonimport) activity involving foreign commerce outside the Sherman Act's reach."7 The FTAIA then "brings such conduct back within the Sherman Act's reach"8 where (1) the conduct has a "direct, substantial, and reasonably foreseeable effect" on U.S. commerce, and (2) that effect "gives rise to" the plaintiff's antitrust claim.9

The FTAIA was largely overlooked for the first 20 years following its enactment. In its first decade of existence, just one federal appellate court construed the FTAIA.10 Remarkably, in two major decisions involving the Sherman Act's extraterritorial effect, the Supreme Court and the First Circuit conspicuously avoided offering any interpretation of the FTAIA.11 It was not until the early twenty-first century that the FTAIA began to pick up currency in antitrust litigation.12

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Once the courts took notice of the FTAIA, a number of debates soon arose. This article will address two, both relating to the statute's "domestic effects" exception.

A. The "Gives Rise To" Prong

One dispute centered on the FTAIA's "gives rise to" clause. Some courts initially held that the FTAIA's requirement that the domestic effect "give rise to a claim"13 could be satisfied so long as the requisite effect gave rise to a claim "by someone, even if not the . . . plaintiff who is before the court."14 In Empagran, the Supreme Court rejected this view, holding that the domestic effect must specifically give rise to the plaintiff's antitrust claim.15 However, the Court declined to elaborate on what that meant.16 The Empagran plaintiffs—foreign purchasers of vitamins—had asserted that "because vitamins are fungible and readily transportable, without an adverse domestic effect (i.e., higher prices in the United States), the sellers could not have maintained their international price-fixing arrangement and respondents would not have suffered their foreign injury."17 Put another way, the Empagran plaintiffs argued that the domestic effect (higher U.S. prices) was a "but for" cause of the higher prices they paid in foreign markets.18

On remand, in a decision that has come to be known as Empagran II, the D.C. Circuit rejected the plaintiffs' proposed "but for" standard.19 The court reasoned that "[t]he statutory language—'gives rise to'—indicates a direct causal relationship, that is, proximate causation, and is not satisfied by [a] mere but-for 'nexus.'"20 Judged against this stricter standard, the plaintiffs' claims were found lacking. The D.C. Circuit held that although the maintenance of "super-competitive prices in the United States may have facilitated the appellees' scheme to charge comparable prices abroad," the charging of supracompetitive prices in the United States did not proximately cause the plaintiffs to pay higher prices in other countries.21 Because of this, the court held, the domestic effect did not "give rise to" a valid antitrust claim.22

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Since then, three federal appellate courts have adopted Empagran II's proximate causation standard for the FTAIA's "gives rise to" prong,23 and none have disagreed with it.

B. The "Direct Effects" Prong

Another debate—which supplies the basis for this article—centered on the meaning of "direct," as in "direct, substantial, and reasonably foreseeable effect." Just three U.S. Courts of Appeals have weighed in on this question, and two interpretations have emerged.

The Ninth Circuit: The Ninth Circuit was the first federal appellate court to venture a definition of "direct" under the FTAIA. The issue arose in United States v. LSL Biotechnologies, a civil enforcement action in which the U.S. Department of Justice (the "DOJ") alleged that LSL Biotechnologies and Hazera, an Israel-based competitor and erstwhile business partner of LSL, had entered into a naked agreement not to compete.24 The challenged restraint, which was embedded in a settlement agreement, provided that Hazera would not compete with LSL in the development, production, or marketing of seeds for tomatoes that had long shelf lives, which were needed to maintain a supply of tomatoes to grocery stores in the United States during the winter months.25 According to the government, Hazera "would likely" have been a "significant competitor of [LSL] in North America" if not for the non-compete agreement.26

LSL moved to dismiss the complaint, asserting a lack of subject matter jurisdiction pursuant to the FTAIA.27 The district court granted the motion with prejudice,28 and the Ninth Circuit affirmed. In so doing, the Ninth Circuit first rejected the DOJ's contention that the FTAIA merely codified Judge Learned Hand's famous Alcoa "effects" test, which provided that extraterritorial agreements in restraint of trade fall beyond the Sherman Act's reach unless their "performance is shown actually to have had some effect upon" U.S. imports or exports.29 The Ninth Circuit noted that, "[u]nlike the FTAIA, the Alcoa test does not require the effect to be 'direct.'"30 Since the court's task was "to give meaning to the words used by Congress," and to "avoid constructions that render words meaningless," the court was obliged to apply the test prescribed by the FTAIA: namely, whether the defendants' conduct caused a "direct, substantial, and reasonably foreseeable effect" on U.S. commerce.31

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But what does that actually mean? Drawing on the Supreme Court's antitrust standing jurisprudence in private damages actions, the DOJ argued that the FTAIA's "direct effect" language invokes "the common law concept of 'proximate cause.'"32 According to the DOJ, all it had to do was "allege[] a proximate cause relationship" between the LSL/Hazera non-compete agreement and the effect on U.S. commerce33—the lack of competition in the United States for long shelf-life tomatoes.

The Ninth Circuit disagreed. The court first pointed to the 1982 edition of Webster's Third New International Dictionary, which defined "direct" as "proceeding from one point to another in time or space without deviation or interruption."34 Perhaps recognizing the unhelpfulness of that definition in resolving the dispute at bar,35 the court next considered the Supreme Court's construction of a "nearly identical term in the Foreign Sovereign Immunities Act ('FSIA')."36 Similar to the FTAIA, the FSIA provides that immunity does not extend to a foreign sovereign's extraterritorial commercial conduct unless that conduct "causes a direct effect in the United States."37 In Republic of Argentina v. Weltover, Inc.,38 the Ninth Circuit noted, "the Supreme Court unanimously declared that an effect is 'direct' if...

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