On June 14, 2004, the U.S. Supreme Court rendered a highly anticipated decision in F. Hoffman-La Roche Ltd. v. Empagran S. A., No. 03-724. The case was about a world-wide cartel of vitamin manufacturers that fixed prices for vitamins and vitamin products throughout the 1990s. The price-fixing resulted in higher prices for vitamin products in the U.S. and abroad. The plaintiffs in Empagran were foreign purchasers of vitamin products (from Ukraine, Australia, Panama, and Ecuador) who were harmed by the inflated prices. When they brought suit against the cartel participants for treble damages in the U.S., the district court dismissed their claims for lack of subject matter jurisdiction. The Court of Appeals for the District of Columbia reversed. The Supreme Court agreed to hear the case and, vacating the Court of Appeal’s decision, held that antitrust claims that are based entirely on “independent foreign harm” are not recognizable under the Sherman Act.

The issue of extraterritorial application of the U.S. antitrust laws has a long and confusing history. The Courts of Appeals have routinely disagreed about the standards that would bring foreign claims under the jurisdiction of U.S. courts. In 1982, Congress passed the “Foreign Trade Antitrust Improvements Act” (”FTAIA“) in order to clarify the issue. Unfortunately, the FTAIA, a notoriously ill-drafted statute, only deepened the confusion. Here is the text of the statute:

Sections 1 to 7 of this title [the Sherman Act] shall not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations unless (1) such conduct has a direct, substantial, and reasonably foreseeable effect (A) on trade or commerce which is not trade or commerce with foreign nations, or on import trade or import commerce with foreign nations; or (B) on export trade or export commerce with foreign nations, of a person engaged in such trade or commerce in the United States; and (2) such effect gives rise to a claim under the provisions of sections 1 to 7 of this title, other than this section. If sections 1 to 7 of this title apply to such conduct only because of the operation of paragraph (1)(B), then sections 1 to 7 of this title shall apply to such conduct only for injury to export business in the United States. (15 U. S. C. §).

Plaintiffs (may) have a claim involving foreign commerce under the Sherman Act if:

(1) the conduct in question has a direct, substantial, and reasonably foreseeable effect (A) on domestic commerce or on import commerce; or (B) on American export commerce; and (2) such effect gives rise to a claim under the Sherman Act.

(1) significant foreign anticompetitive conduct with (2) an adverse domestic effect and (3) an independent foreign effect giving rise to the claim,” (Empagran., at 2.)

Suppose that the same commodity (say, for example, vitamins) is sold in country A for $1/unit and in country B for $2/unit. Suppose further that transportation and transaction costs are low. What happens? The price discrimination scheme collapses because of arbitrage. Buyers in country A will purchase greater quantities for $1/unit and resell the product to buyers in country B. If there are competing arbitrageurs in country A, resale prices to buyers in country B will approach $1/unit plus transaction and transportation cost. In other words, “foreign effects” cannot be sustained but for the existence of “domestic effects.” Put differently, an international manufacturer cartel cannot charge monopoly prices in, say, Ecuador if the same good is available in the U.S. at lower prices. Conversely, if the manufacturer cartel is, in fact, able to sustain monopoly prices in Ecuador and is also charging monopoly prices in the U.S., then the foreign effects (higher prices in Ecuador) are dependent on domestic effects (higher prices in the U.S.).

The Supreme Court expressly did not decide whether a foreign effect that could not exist (in that magnitude) “but for” a domestic effect would constitute an independent foreign effect. In the next to last paragraph of the opinion, the Supreme Court defined dependence in terms of a supporting cause. (”We have assumed that the anticompetitive conduct here independently caused foreign injury; that is, the conduct’s domestic effects did not help to bring about that foreign injury.”) (Id., at 19. Emphasis added.) On the basis of that definition, it seems that a foreign effect that could not exist (in that magnitude) but for the domestic effect cannot be independent.

The implications of the Supreme Court’s narrow definition of independence (or broad definition of dependence) are considerable. Every successful price-fixing conspiracy or market allocation agreement for products in a global geographic market will, by definition, cause foreign harm that is dependent on domestic harm. The connection is a conceptual one, because if the foreign harm was, in fact, independent of the domestic harm, then the geographic market would not be global. The Supreme Court applied a jurisdictional category (domestic/foreign), which is based on the notion of political borders, to a phenomenon of global commerce that disregards such borders (in the absence of tariffs) entirely.

The bottom line is that the Supreme Court in Empagran expressly refrained from deciding the Empagran fact pattern. The decision only applies to a narrow category of cases where international cartels affect a number of strictly national markets; region-coded content comes to mind as an example. For the vast majority of cases involving homogenous products, Empagran has not brought legal certainty.

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