On 27 June 2012, the U.S. Court of Appeals for the Seventh Circuit answered several important questions about the Foreign Trade Antitrust Improvements Act of 1982 (FTAIA).
15 U.S.C. § 6a of this Act dictates when U.S. antitrust laws may apply to anticompetitive conduct occurring outside the United States but having an effect in the United States. In Minn-Chem, Inc. v. Agrium Inc., No. 10-1712 (7th Cir. 2012) (en banc) (Potash II), the Seventh Circuit resolved three issues under the statute. First, the court held that the provisions of the FTAIA are substantive elements of an antitrust claim relating to foreign commerce. Second, the court held that the provisions of the FTAIA do not govern “import commerce.” Finally, and most significantly, the court interpreted the FTAIA’s provision that allegedly anticompetitive foreign conduct have a “direct” effect on commerce in the United States to require only a “reasonably proximate” causal link between the alleged anticompetitive conduct and its putative effects on U.S. commerce. In doing so, the court rejected the Ninth Circuit’s stricter interpretation of the FTAIA, which requires that the alleged effect be an “immediate consequence” of the putatively anticompetitive conduct. Under this decision, it is now easier, at least in the Seventh Circuit, for both the U.S. government and private plaintiffs to challenge foreign conduct under the U.S. antitrust laws.
Potash II centres on allegations of a global scheme to fix the price of “potash,” a naturally occurring potassium-rich mineral used primarily in agricultural fertilizers. According to the complaint in the case, potash is a fungible commodity, meaning that one manufacturer’s supply is interchangeable with another’s, sold in a worldwide market. Over half of the world’s potash reserves are located in two regions, Canada and the countries of the former Soviet Union.
The plaintiffs (U.S. companies who are direct purchasers of potash) accused several foreign potash producers of conspiring to fix the price of potash in the United States, in violation of the Sherman Act. The plaintiffs alleged that, as of 2008, the seven entities controlled by the defendants produced 71 percent of the world’s supply of potash. That year, the United States consumed 6.2 million tons of potash. 5.3 million tons were imported, and the defendants were responsible for the vast majority of those import sales. The plaintiffs further alleged that the defendants, beginning in 2003, collectively restrained their individual outputs of potash in order to inflate the price of potash, first in Brazil, India, and China, and then in the United States. The plaintiffs claimed that the defendants coordinated their efforts through joint ventures, meetings, employee exchange programs, and trade organization memberships. According to the complaint, between 2003 and 2008, the price of potash in the United States increased by at least 600 percent, and the plaintiffs asserted that the increase could not be explained by the increased demand or increased production or input costs.
The district court denied the defendants’ motion to dismiss the plaintiffs’ complaint, but certified its ruling for interlocutory appeal. A three-judge panel of the Seventh Circuit initially reversed the district court, holding that the complaint failed to meet the requirements of the FTAIA, and thus that defendants’ conduct was not subject to the Sherman Act. The full Seventh Circuit then voted to rehear the case en banc, and, upon rehearing, unanimously affirmed the order of the district court, holding that the complaint, in fact, satisfied the requirements of the FTAIA. The defendants subsequently moved the Seventh Circuit to stay proceedings in the district court, pending the defendants’ petition for writ of certiorari in the U.S. Supreme Court.
The court’s opinion first overrules prior Seventh Circuit precedent by holding that the FTAIA’s requirements relate to the merits of a plaintiff’s claim and not to the subject matter jurisdiction of the court. In other words, the FTAIA sets forth substantive legal standards about when the U.S. antitrust laws may apply to foreign conduct, not when the U.S. federal courts have the authority to hear a case about foreign conduct. As such, the FTAIA’s requirements are to be treated as elements of a Sherman Act claim. This holding is procedurally significant. If the FTAIA were jurisdictional, a defendant seeking to challenge the propriety of a lawsuit related to foreign conduct would do so under Federal Rule of Civil Procedure 12(b)(1). Subject-matter jurisdiction must be present at all times, and a court may consider its jurisdiction to hear a case at any point and regardless of whether the parties have raised the issue. In addition, parties challenging subject matter jurisdiction at the pleading stage are free to submit declarations, affidavits, and documents in support of their arguments and the trial courts must consider that material in determining jurisdiction. But because the court held that the FTAIA goes to the merits of an antitrust claim, a defendant challenging the propriety of a lawsuit related to foreign conduct at the pleading stage must do so under Rule 12(b)(6). Dismissal for failure to state a claim must be raised by the defendant, not the court, and such a motion must be brought before trial. Most importantly, the court accepts the plaintiff’s well-pleaded factual allegations as true and generally does not consider material beyond the factual assertions in the complaint, which makes dismissal at the pleading stage difficult.
The court then turned to the substantive provisions of the FTAIA. The FTAIA states that the U.S. antitrust laws do not apply to foreign conduct unless the conduct has a “direct, substantial, and reasonably foreseeable effect on trade or commerce which is not trade or commerce with foreign nations, or on import trade or import commerce with foreign nations.” See 15 U.S.C. § 6a. Because the court found that much of the alleged conduct was import commerce – defendants, foreign producers, sold potash directly to plaintiffs, U.S. entities – it first reiterated that import commerce, like domestic commerce, is subject to only the general requirements of the U.S. antitrust laws, and not to the special requirements of the FTAIA. The court applied the longstanding rule that, to state a claim under the Sherman Act related to import commerce, plaintiffs must allege that the allegedly anticompetitive foreign conduct produced a “substantial intended effect” in the United States. The court found that the complaint satisfied that relatively minimal threshold, noting that plaintiffs alleged that in 2008 the defendants controlled 71 percent of the world’s supply of potash and were responsible for the vast majority of the 5.3 million tons of potash imported to the United States, where the price of potash increased at least six-fold between 2003 and 2008.
The court then considered the special requirements of the FTAIA that are applicable to allegedly anticompetitive foreign conduct because it concluded that some of the unlawful activity asserted in the complaint, such as the agreed-upon output restrictions in Brazil, India, and China, was wholly foreign. The court had little trouble interpreting and applying the “substantial” and “reasonably foreseeable” effects requirements. Without drawing any lines as to what constitutes a “substantial” effect on U.S. commerce, the court held that plaintiffs’ allegations – that defendants were responsible for the vast majority of the 5.3 million tons of potash imported to the United States in 2008 and that the price of potash in the United States increased by at least 600 percent over a six-year period – “easily satisfy” the requirement. And the court made quick work of the FTAIA’s “reasonably foreseeable” provision, noting that it is “objectively foreseeable” that the price of potash will increase when companies controlling 71 percent of the world’s supply collectively agree to reduce their individual outputs of the commodity.
The court had greater difficulty with the FTAIA’s “direct” effects requirement. The court noted but rejected the Ninth Circuit’s conclusion that “direct” means that the effect must be an “immediate consequence” of the alleged conduct. Instead, the court accepted the Department of Justice’s argument that “direct” means only a “reasonably proximate causal nexus” between the effect and the alleged conduct. The court reasoned that imposing an “immediate consequence” requirement on the full phrase “direct, substantial, and reasonably foreseeable effect” would swallow the notion of foreseeability and result in an unduly strict test. Applying its new standard, the court easily concluded that defendants’ output restrictions and subsequent price increases in Brazil, India, and China were a “proximate” cause of the price increases in the United States. The court thus found that defendants’ foreign commerce was subject to the Sherman Act.
Whether the “reasonably proximate” standard ultimately rules the day is yet to be seen. The defendants’ petition for writ of certiorari is due 25 September 2012 and, given the split between the Seventh Circuit’s construction of the statute and the Ninth Circuit’s approach, the Supreme Court may vote to grant the petition. Nevertheless, businesses should be aware that, at least in the Seventh Circuit, it is now easier for both the U.S. government and private plaintiffs to challenge foreign conduct under the U.S. antitrust laws. Although the Seventh Circuit stated that its “direct” effect standard has “teeth,” its approach is indisputably more lenient than the Ninth Circuit’s “immediate consequence” standard. And the Seventh Circuit’s approach arguably adds nothing beyond the “reasonably foreseeable” requirement, making that provision of the FTAIA redundant. Businesses should also be aware that, at least in the Seventh Circuit, antitrust lawsuits challenging allegedly anticompetitive conduct occurring in foreign countries will be difficult to dismiss at the pleading stage for failure to state a claim, given both this less rigorous “direct” effect standard and the court’s ruling that the FTAIA relates to the merits of a claim, and not the subject-matter jurisdiction of the court.