For many years, foreign companies whose activities have only an indirect connection with the United States have enjoyed some measure of protection from being sued for alleged antitrust violations in U.S. courts by the Foreign Trade Antitrust Improvements Act (FTAIA). A recent decision by the U.S. Court of Appeals for the Third Circuit, however, has created uncertainty in what had seemed to be settled jurisprudence, and potentially exposes foreign companies to the jurisdiction of U.S. antitrust courts in a wider range of circumstances.
In Animal Science Products, Inc. v. China Minmetals Corp. (3d Cir. Aug. 17, 2011) (decision available here), the Third Circuit overruled prior case law and held that the FTAIA does not impose a jurisdictional bar on antitrust claims involving trade or commerce with foreign nations, but rather merely sets forth required elements of an antitrust claim involving foreign trade. This technical distinction has real-world consequences, because it will likely make achieving early dismissal of some U.S. antitrust claims against foreign companies more difficult – slightly so or very much so, depending on the circumstances. The decision also sets forth factors, highlighted below, that inform the analysis of whether foreign firms' conduct is directed at U.S. import trade and thus within an FTAIA exemption and subject to U.S. antitrust law.
The FTAIA exempts certain foreign conduct from the reach of the Sherman Act, the main U.S. antitrust law addressing cartel and monopolistic behavior. At the same time, it provides that the Sherman Act will apply if the defendants are involved in "import trade or commerce" or if the defendants' conduct has a "direct, substantial, and reasonably foreseeable effect" on domestic commerce, import commerce, or certain export commerce, and the conduct "gives rise" to a Sherman Act claim. Courts have historically treated the FTAIA as creating a jurisdictional bar to antitrust claims involving trade or commerce with foreign countries, and have entertained and granted motions to dismiss complaints for lack of jurisdiction under the FTAIA.
Animal Science Products Rejects the Argument That the FTAIA Creates a Jurisdictional Bar
The plaintiffs in Animal Science Products are U.S. entities that purchased a substance known as "magnesite" from Chinese producers. They brought a putative class action alleging that the Chinese producers engaged in a price-fixing conspiracy that had an impact on United States commerce and therefore violated Section 1 of the Sherman Act. Although neither party initially raised the FTAIA in briefing the motion to dismiss, the district court considered the issue on its own, and dismissed both plaintiffs' first complaint and amended complaint on the ground that it lacked subject matter jurisdiction to adjudicate the dispute under the FTAIA.
The Third Circuit reversed, and reinstated the complaints. The court based its ruling on the Supreme Court's decision in Arbaugh v. Y&H Corp., 546 U.S. 500 (2006), which involved neither the FTAIA nor even an antitrust claim. In Arbaugh, the Supreme Court distinguished between substantive limitations on claims set out in federal legislation and the subject matter jurisdiction of the U.S. courts. The Court ruled that a statutory limitation is jurisdictional – meaning that courts cannot even hear a case that does not meet the requirements – only if Congress "clearly states" that it intends for a limitation to be jurisdictional. See id. at 515-16. Applying this rule, the Third Circuit determined that the FTAIA does not impose a subject matter jurisdiction bar, because it "neither speaks in jurisdictional terms nor refers in any way to the jurisdiction of the district courts." Instead, the court wrote, "the [FTAIA] statutory text is wholly silent" about federal court jurisdiction. Significantly, the appellate court's decision charted a new course in the law and overrules prior decisions to the contrary. It also conflicts with decisions of other courts, including the U.S. Court of Appeals for the Seventh Circuit, which had determined in United Phosphorus, Ltd. v. Angus Chemical Co., 322 F.3d 942 (7th Cir. 2003) (en banc), a case predating Arbaugh, that the FTAIA does impose a subject matter jurisdiction bar. For now, there is a circuit split and the law is not fully settled.
Significance of the Jurisdiction/Elements of Claim Distinction: Burden on Defendants
Under Animal Science Products, FTAIA limitations help define the necessary elements of a plaintiff's claim, but do not create a jurisdictional bar to suit. This distinction is significant for at least two reasons.
First, the burden on a motion directed at lack of subject matter jurisdiction rests with the plaintiff. In contrast, on a more typical defense motion to dismiss for failure to state a claim, the defendant carries the burden. Second, on a lack of subject matter jurisdiction motion, the court can usually look outside the four corners of the complaint and consider and determine other facts which might allow a case to go forward. On a motion to dismiss for failure to state a claim, the court must generally look only at the face of the complaint, and must accept all alleged facts to be true.
These procedural differences shift the burden to the defendant seeking an early dismissal and preclude the defendant from offering facts outside the plaintiff's complaint. They are likely to make some motions to dismiss claims on FTAIA grounds more difficult to win. The difference may mean millions of dollars in discovery, and the possibility of a jury trial if summary judgment is not granted.
Animal Science Products' Guidance as to Application of FTAIA Import Exception to Foreign Companies
The Third Circuit remanded the Animal Science Products case to the district court to determine under the new standard whether the substantive requirements of the statute had been satisfied. In doing so, it offered some guidance as to the application of the FTAIA's "import trade or commerce" exception to foreign companies.
- First, the exception must be given a "relatively strict" construction. However, although functioning as a physical importer may satisfy the import trade or commerce exception, it is not a necessary prerequisite. Rather, the inquiry is whether the defendants' alleged anti-competitive behavior was "directed at" an import market. Nor, the court suggested, are foreign defendants necessarily beyond the reach of U.S. antitrust law just because the port of first destination of goods sold is outside the U.S.
- Second, the court held that the FTAIA's "effects" exemption does not contain a "subjective intent" requirement. Instead, the "direct" and "substantial" effect contemplated by the FTAIA must merely have been "foreseeable" to an objectively reasonable person.
- Finally, the court listed specific factors that may support application of U.S. antitrust law to foreign defendants. These include whether the defendants took steps to prevent foreign manufacturers from selling to U.S. firms, or to prevent at least one American firm from purchasing product directly from certain foreign manufacturers. Additionally, although the port of first destination question is not dispositive, it may be relevant to whether foreign sellers' actions were directed at a U.S. import market. Shipments to the U.S. increase the likelihood that the FTAIA exemption (and thus the Sherman Act) applies.
In the court's view, "the import trade or commerce exception requires that the defendants' conduct target import goods or services." In assessing their exposure to U.S. antitrust law, foreign manufacturers may wish to consider whether their activities "objectively" do so in light of the above factors.
In sum, the Animal Science Products case imposes on foreign entities a new level of diligence if they wish to have confidence that their activities will escape scrutiny by U.S. courts. At least until the law is clarified further, this case sets the standard to which prudent businesses should tailor their conduct.