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. §).
Technically, the FTAIA is an exception to the application of the Sherman Act. Following the time-honored legal tradition of avoiding straightforward statements such as “if A then B” by artfully applying double negatives (”B is not applicable unless A”), the critical “domestic effect” test is hidden as an exception to the exception. In human-readable form, the FTAIA provides that:
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.
The critical questions for the Supreme Court were, what constituted an “effect on domestic commerce”; and whether “a claim under the Sherman Act” had to be the claim of
the foreign plaintiff or if it was sufficient
for someone else in the U.S. to have
a hypothetical claim against the defendant under the Sherman Act. Thankfully, the Supreme Court resolved the second issue in a sensible manner; “a claim” refers to the plaintiff’s own claim. With respect to the “domestic effect,” however, the Supreme Court relied on a distinction between domestic and foreign effects, the latter being further divided into independent and dependent foreign effects. In a situation where there is
(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.)
the Supreme Court held that domestic plaintiffs can bring a claim based on domestic injury but foreign plaintiffs cannot bring a claim based solely on independent foreign injury. The Court did not decide what happens in cases where the foreign effect is dependent upon the domestic effect. The chart below provides an overview of the three categories discussed by Empagran. Note that the holding of the decision only applies to one of the three categories.
From a practical point of view, the most important question is whether the “independent foreign harm” category of cases is the rule and the “dependent foreign harm” category the exception or vice versa. If the “independent” cases are the norm, then the Supreme Court’s opinion will have significant impact on foreign plaintiffs, because it is now clear that “independent” plaintiffs cannot bring Sherman Act cases in the U.S. Conversely, if the “independent” cases are the exception, the Empagran rule has limited practical application, and it will take a great deal of future litigation to determine whether “dependent” cases are to be treated like “independent” cases (that is, no Sherman Act claims in the U.S.) or rather like domestic harm cases (that is, foreign plaintiffs may sue under the Sherman Act in the U.S.). Basic microeconomics strongly suggests the latter, in fact, it is pretty difficult to come up with a hypothetical where there is an international conspiracy, affecting prices in the U.S. and abroad, where the foreign harm is independent of domestic harm. Ironically, the Empagran case is probably a prime example of a fact pattern that does not fit the independent foreign harm mold.
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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