A court in the Central District of California recently applied the Act of State doctrine to dismiss a complaint against two private companies that are minority owners of a third company, also a defendant, which is majority-owned by the Mexican government. U.S. District Judge Dolly M. Gee held that the relief the plaintiffs sought would require the court to deem the official acts of a foreign sovereign invalid, and that the private entities had standing to invoke the doctrine. Sea Breeze Salt, Inc. et al. v. Mitsubishi Corp. et al., CV 16-2345-DMG, ECF No. 45 (Aug. 18, 2016).
Mitsubishi Corporation and Mitsubishi International Corporation (collectively, “Mitsubishi”), the defendants that moved for dismissal, own 49% of co-defendant Exportadora de Sal, S.A. de C.V. (“ESSA”), a major producer and exporter of solar sea salt products worldwide. The Mexican government owns the remaining 51% of ESSA. According to plaintiffs Sea Breeze Salt, Inc. (“Sea Breeze”) and Innofood, S.A. de C.V. (“Innofood”), Mitsubishi and ESSA violated Section 1 of the Sherman Act and California’s Cartwright Act by illegally agreeing that ESSA would not sell sea salt to any distributor other than Mitsubishi. This included Innofood, which alleged that it had a contract with ESSA to purchase sea salt that it, in turn, had agreed to sell to Sea Breeze. In addition to the Sherman and Cartwright Act claims, the plaintiffs alleged that Mitsubishi forced ESSA not to sell to Innofood, resulting in an unlawful exclusive dealing arrangement that violated Section 3 of the Clayton Act.
The court first concluded that it had subject matter jurisdiction because the commercial activity exception to the Foreign Sovereign Immunity Act applied. Mitsubishi’s alleged conduct was commercial and, if proven, would have caused a direct effect in the United States. Next, the court considered whether Mitsubishi’s alleged conduct is immunized by the Act of State doctrine by asking whether: (i) there was an official act of a foreign sovereign performed within its own territory; and (ii) the relief sought would require a U.S. court to declare invalid the foreign sovereign’s official act. The court determined that ESSA is a foreign sovereign for purposes of the Act of State doctrine because the Mexican government is ESSA’s majority owner. That conclusion is consistent with Ninth Circuit law, which deems an entity that is majority-owned by a foreign state to be a foreign state itself. Judge Gee further found that the antitrust law violations set forth in the complaint all hinged on ESSA’s alleged agreement (and alleged decision to renege on certain agreements) to sell salt to distributors, which decisions were “official acts” that took place within Mexico’s borders.
Turning to the second prong of the analysis, the court held that resolution of the case would require it to pass judgment on “the validity of and motivation behind” ESSA’s decisions to give Mitsubishi exclusive distribution rights, offer Mitsubishi below-market pricing, and back out of its contract with Innofood – all of which the plaintiffs claimed was the result of Mitsubishi having “taken advantage of the neglect of some Mexican government officials while actively corrupting or subverting others.” Also of significance was the fact that the plaintiffs sought an injunction against the foreign sovereign’s conduct that was the subject of the complaint. Thus, the court found itself faced with the possibility of having to declare a foreign sovereign’s actions invalid.
The plaintiffs argued that even if ESSA is properly considered a state-owned enterprise, because ESSA functions as a commercial entity and not as the Mexican state, the Act of State doctrine does not apply. Unlike the FSIA, the court held, the Act of State doctrine contains no “commercial activity” exception – a statement based on the Ninth Circuit’s decision in Int’l Assoc. of Machinists & Aerospace Workers v. Org. of Petroleum Exporting Countries, 649 F.2d 1354, 1361 (9th Cir. 1981). The court also held that Mitsubishi could invoke the Act of State doctrine as a defense even though it is a private entity and not an agency of a foreign government, citing Ninth Circuit case law that so holds even where no sovereign state is a party to an action. The court recognized that, given the intertwined nature of Mitsubishi’s and ESSA’s alleged actions, and given that ESSA is a foreign sovereign for purposes of the analysis, “allowing this action to proceed against Mitsubishi would be tantamount to an end-run around the Act of State doctrine.”