On June 27 2012 the US Court of Appeals for the Seventh Circuit answered several important questions about the Foreign Trade Antitrust Improvements Act of 1982.(1) The act dictates when the US antitrust laws may apply to anti-competitive conduct occurring outside the United States, but having an effect in the United States. In Minn-Chem, Inc v Agrium Inc(2) (Potash II) the Seventh Circuit resolved three issues under the statute. First, the court held that the provisions of the act are substantive elements of an antitrust claim relating to foreign commerce. Second, the court held that the act does not govern "import commerce". Finally, and most significantly, the court interpreted the act's requirement that allegedly anti-competitive foreign conduct must have a direct effect on commerce in the United States to require only a "reasonably proximate" causal link between such conduct and its putative effects on US commerce. In doing so, the court rejected the Ninth Circuit's stricter interpretation of that provision, which required that the alleged effect be an "immediate consequence" of the putatively anti-competitive conduct. Under Potash II, it is now easier – at least in the Seventh Circuit –for both the US government and private plaintiffs to challenge foreign conduct under the US antitrust laws.
Potash II centred on allegations of a global scheme to fix the price of potash, a naturally occurring potassium-rich mineral used primarily in agricultural fertilisers. According to the complaint, 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 former Soviet Union.
The plaintiffs, US companies that 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% 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, beginning in 2003, the defendants 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 programmes and trade organisation memberships. According to the complaint, between 2003 and 2008 the price of potash in the United States increased by at least 600%; the plaintiffs asserted that the increase could not be explained by increased demand or increased production or input costs.
The district court denied the defendants' motion to dismiss the plaintiffs' complaint under the Foreign Trade Antitrust Improvements Act, 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 act, and thus that the 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 satisfied the requirements of the act. The defendants subsequently moved the Seventh Circuit to stay proceedings in the case, pending the defendants' petition for writ of certiorari in the Supreme Court, but the court denied that motion.
The court's opinion first overruled prior Seventh Circuit precedent by holding that the act'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 act sets forth substantive legal standards about when the US antitrust laws may apply to foreign conduct, not when the US federal courts have the authority to hear a case about foreign conduct. As such, the act's requirements are to be treated as elements of a Sherman Act claim. This holding is procedurally significant. If the act 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 act 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, when addressing a motion to dismiss under Rule 12(b)(6), courts accept the plaintiff's well-pleaded factual allegations as true and generally do not consider material beyond the factual assertions in the complaint. Those procedural rules applicable to Rule 12(b)(6) motions make dismissal for failure to state a legal claim difficult in the early stages of a case.
The court then turned to the substantive provisions of the act. The act states that the US 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".(3) Because the court found that much of the alleged conduct was import commerce – the defendants, foreign producers, sold potash directly to the plaintiffs, US entities – it first reiterated that import commerce, like domestic commerce, is subject only to the general requirements of the US antitrust laws, and not to the special requirements of the act. 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 anti-competitive foreign conduct produced a "substantial intended effect" in the United States. The court found that the complaint satisfied that relatively minimal threshold, noting that the plaintiffs alleged that in 2008 the defendants controlled 71% 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 sixfold between 2003 and 2008.
The court then considered the special requirements of the act that are applicable to allegedly anti-competitive 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 US commerce, the court held that the plaintiffs' allegations – that the defendants were responsible for the vast majority of the 5.3 million tons of potash imported into the United States in 2008, and that the price of potash in the United States increased by at least 600% over a six-year period – easily satisfied the requirement. The court also made quick work of the act's reasonably foreseeable provision, noting that it was "objectively foreseeable" that the price of potash would increase when companies controlling 71% of the world's supply collectively agreed to reduce their individual outputs of the commodity.
The court had greater difficulty with the act'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 the 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 the defendants' foreign commerce was subject to the Sherman Act.
The defendants' petition for writ of certiorari is due on September 25 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. Whether or not the reasonably proximate standard ultimately rules the day, businesses should be aware that – at least in the Seventh Circuit – it is now easier for both the US government and private plaintiffs to challenge foreign conduct under the US 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 act redundant. Businesses should also be aware that – at least in the Seventh Circuit – antitrust lawsuits challenging allegedly anti-competitive conduct occurring in foreign countries will be difficult to dismiss at the pleading stage for failure to state a claim, given both the less rigorous direct effect standard and the court's ruling that the act relates to the merits of a claim, and not the subject matter jurisdiction of the court.
For further information on this topic please contact William L Monts III or William H Rawson at Hogan Lovells US LLP by telephone (+1 202 637 5600), fax (+1 202 637 5910) or email ([email protected] or [email protected]).
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