The US Court of Appeals for the Seventh Circuit has issued an en banc decision in Minn-Chem, Inc. v Agrium Inc. that may expand dramatically the extraterritorial reach of US antitrust laws. In this briefing we examine that case and explain what it means for you.
In Minn-Chem, Inc., the Seventh Circuit considered whether several foreign companies that market, sell and distribute potash globally could be hauled into US court on price-fixing claims when all the alleged anti-competitive conduct occurred outside the US. In permitting the lawsuit to go forward, the court reached two significant conclusions:
- the Foreign Trade Antitrust Improvements Act (FTAIA) does not impose a jurisdictional limitation on the US antitrust laws, but rather adds a substantive element that must be proved under the Sherman Act; and
- foreign activities have a sufficiently ‘direct’ effect on US commerce to permit a challenge under the US antitrust laws so long as there is ‘a reasonably proximate causal nexus’ between the foreign activity and the effect on US commerce.
The decision potentially has far-reaching implications for foreign firms because private plaintiffs and the US antitrust authorities may now feel more confident about challenging foreign conduct that may have been dismissed under earlier precedent.
The lead-up to the case
In 2008, several US buyers filed a class action complaint accusing several companies that market, sell and distribute potash globally of price-fixing in violation of the Sherman Act. Potash is a mineral salt rich in potassium and is mined in naturally occurring ore deposits. It is mainly used in agricultural fertilisers. The plaintiffs alleged that the defendants, who together control roughly 71 per cent of the world’s potash supply, restrained global output and engaged in high-level co-operation, inflating potash prices in the US. Although some of the defendants import potash into the US, the plaintiffs only alleged anti-competitive conduct outside the US.
The plaintiffs’ claims
First, the plaintiffs asserted that to artificially increase potash prices, the defendants restricted their collective output through co-ordinated mine stoppages. The complaint also describes several means by which the defendants monitored one another’s actions to prevent cheating and co-ordinated future conduct, including through: joint ventures, senior executive exchange programmes, visits to plants, and trade association conferences.
Second, the plaintiffs alleged that the defendants used the output restrictions to negotiate inflated prices of potash in Brazil, India and China, then used those foreign prices as benchmarks for sales into the US. As evidence of the cartel’s effect in the US, the plaintiffs pointed to an increase in the price of potash of at least 600 per cent from mid-2003 to 2008, despite demand remaining relatively flat during the same period.
The defendants’ response
The defendants moved the district court to dismiss the complaint on the grounds that the court lacked jurisdiction under the FTAIA. The FTAIA limits the reach of the US antitrust laws to foreign anti-competitive conduct that either involves US import commerce or has a ‘direct, substantial, and reasonably foreseeable effect’ on US import or domestic commerce.
How the case moved forward
The court denied the motion and held that the plaintiffs had alleged a sufficiently tight link between the defendants’ price-fixing conduct and the defendants’ US import sales to conclude that the former involved the latter. The plaintiffs’ complaint thus survived based on the ‘import commerce’ clause of the FTAIA.
The Seventh Circuit accepted an immediate appeal, and a three-judge panel held that the district court erred in relying on the ‘import commerce’ clause of the FTAIA.
The panel explained that the ‘import commerce’ clause captures foreign anti-competitive conduct if the conduct actually involves the US import market, whereas the ‘direct effects’ clause captures foreign anti-competitive conduct that has a ‘direct, substantial, and reasonably foreseeable effect’ on the US market regardless of whether the conduct involves the US import market. The panel held that the plaintiffs failed to trigger the ‘import commerce’ clause because the complaint contained no allegations that the defendants had agreed on an American price or production quota for potash.
With respect to the ‘direct effects’ clause, the court held that the plaintiffs failed to allege that the defendants’ conduct had a ‘direct, substantial, and reasonably foreseeable effect’ on the US market. For instance, the plaintiffs did not allege worldwide production quotas or a global cartel price, but only that the benchmarks established for sales in Brazil, India and China influenced prices in other markets.
At best, such allegations merely suggested that the defendants’ activities had a ‘ripple effect’ on the US market. The panel thus concluded there was only a speculative connection between the cartelised prices of potash overseas and the price of potash in the US, and dismissed the complaint.
Seventh Circuit’s en banc decision in detail
The plaintiffs sought a rehearing en banc (ie, before all the court’s active judges) and, following rehearing, the Seventh Circuit unanimously affirmed the district court’s decision.
The en banc decision potentially expands significantly the extraterritorial reach of the US antitrust laws, making it more difficult for defendants to successfully dismiss complaints on FTAIA grounds, and emboldening private plaintiffs and the US authorities to pursue claims that may have been dismissed under earlier precedent.
First, relying on recent Supreme Court cases, the Seventh Circuit reversed a near-decade-old precedent and held that the FTAIA is not a ‘jurisdictional’ statute, but rather adds a substantive element to claims under the Sherman Act. The ruling is significant because it makes it easier for plaintiffs to survive motions to dismiss based on the FTAIA.
If the court had found that the FTAIA limited the jurisdiction of US courts to entertain antitrust claims based on foreign conduct, the plaintiffs would have had to prove that the alleged anti-competitive conduct had a sufficiently tight link to the US to be heard by the US courts, and the defendants could have offered evidence to support their challenge.
Instead, having concluded that the FTAIA relates to the merits of a claim under the Sherman Act, the court was required to assume that the plaintiffs’ allegations were true. The defendants thus bore the burden of showing that the complaint failed to allege sufficient facts to state a plausible claim under the Sherman Act.
Second, the Seventh Circuit found that, as an initial matter, many of the plaintiffs’ allegations did fall within the ‘import commerce’ clause of the FTAIA. The court explained that many of the defendants sold potash directly to the plaintiffs. Accordingly, for the FTAIA’s ‘import commerce’ clause to apply to these transactions, the plaintiffs needed only to show that the conduct of the foreign cartel members was meant to produce and did in fact produce some substantial effect in the US.
The court found that the plaintiffs easily met these requirements by alleging that the defendants participated in a global cartel that controlled most the worldwide potash capacity and sought to inflate prices, and that the US is one of the largest consumers of foreign potash and endured a six-fold price increase between 2003 and 2008.
More significantly, however, because some of the defendants did not actually sell potash to the plaintiffs, the Seventh Circuit also examined how ‘direct’ the effect of those defendants’ foreign activities must be on US commerce to fall within the reach of the US antitrust laws under the ‘direct effects’ clause. The Ninth Circuit has held that an effect is ‘direct’ if it ‘follows as an immediate consequence of the defendant’s… activities.’
In its en banc decision, the Seventh Circuit rejected this interpretation and adopted a more expansive version endorsed by the US Department of Justice. The Seventh Circuit held that ‘direct’ for purposes of the FTAIA means that there is ‘a reasonably proximate causal nexus’ between the foreign activity and the purported effect on US commerce.
Naturally, this broader interpretation of the FTAIA makes it easier for plaintiffs to allege facts sufficient to state a plausible claim under the Sherman Act and to survive a motion to dismiss. Indeed, in measuring the complaint against this new standard, the Seventh Circuit easily concluded that the conduct alleged stated a plausible claim. In particular, the court pointed to allegations that the defendants’ output restrictions led to price increases in foreign markets, which in turn served as inflated benchmarks for US prices.
Although it is unclear whether other US courts will adopt the Seventh Circuit’s reading of the FTAIA, or whether the Supreme Court will consider the issue, foreign firms should understand that, at least in the Seventh Circuit, it will likely be more difficult for defendants to succeed on a motion to dismiss based on the FTAIA.
The decision also may embolden plaintiffs to test complaints that would not have survived under prior precedent. Moreover, although the potash litigation was a civil case, it is important to understand that the Seventh Circuit’s analysis applies equally in the criminal context. Accordingly, US authorities may choose to broaden their enforcement agenda, including by expanding the sales they consider relevant for purposes of calculating a fine, by filing cases involving foreign businesses in the Seventh Circuit.