DOJ Describes Its Approach to Merger Remedies
By Sandeep Vaheesan
The U.S. Department of Justice (DOJ) Antitrust Division issued an updated version of its Policy Guide to Merger Remedies. This is a policy statement used by attorneys within the Antitrust Division to help guide them regarding the appropriate remedy in a merger investigation. As stated in the Policy Guide, the underlying purpose of all merger remedies is to preserve the level of competition that existed before the merger.
In general, the DOJ will pursue two basic types of remedies in merger cases. In horizontal mergers between actual or potential competitors, the DOJ will typically require structural remedies, such as requiring the merging parties to divest assets or entire business divisions to a third party. Conduct remedies, which require behavioral obligations or restrictions on the merged entities, are more likely to be used in vertical mergers, that involve the combination of parties with an actual or potential customer-supplier relationship.
For the DOJ to be satisfied with a divestiture remedy, the assets — physical and intangible — that are sold must allow the purchaser "to compete effectively with the merged entity." The DOJ prefers divestitures that involve the sale of an existing business entity that has "demonstrated its ability to compete in the relevant market." In some cases, a divestiture of less than an existing business may be sufficient for the DOJ. For example, the DOJ may accept such a divestiture if it is persuaded that the merging entities can sell a package of assets that allows the purchaser to preserve the existing level of competition. In other instances, the DOJ may require the merging parties to divest more than an existing business entity. For example, in some industries, firms may not be able to compete without a "full line" of products and may require assets necessary to produce the full line even if the merger raises competitive concerns in only a subset of these product markets.
Beyond divestitures, the other common types of relief include information firewalls, nondiscrimination provisions, mandatory licensing, transparency and anti-retaliation provisions, and restrictions on certain contracting practices. Firewalls are used if the DOJ is concerned that, for example, an upstream monopolist will share information with its acquired downstream entity and other downstream firms to facilitate anticompetitive behavior. Non-discrimination provisions require an upstream monopolist to provide critical inputs on the basis of equal access, equal efforts, and equal terms, preventing the possibility that the upstream firm offers less attractive terms to, or refuses to deal with, the rivals of its downstream affiliate. Mandatory licensing is similar to non-discrimination and requires the merged entity to license technology or other intangible assets on fair and reasonable terms. Transparency requirements require the merged entity to provide information to a regulatory agency that it otherwise would not have to provide. Anti-retaliation provisions prohibit the merged entity from retaliating against customers or others who, for example, do business with its competitors or who report possible consent decree violations to the DOJ. Prohibitions on restrictive contracting typically bar the merged entity from using exclusive contracts or automatic renewal provisions, which can exclude competitors and new entrants.
The DOJ pursues hybrid remedies for some potentially anticompetitive mergers where a combination of conduct and structural remedies may be necessary to preserve competition. For example, in some mergers, the DOJ may require the merging parties to divest certain customer contracts (structural relief) and refrain from exclusive dealing (conduct relief).
The timing of the remedy plays a major role in structural relief. Sometimes, the merging parties may seek a "fix-it-first" remedy that resolves competitive concerns without forcing the DOJ to file a complaint. For the DOJ to accept a fix-it-first remedy, it must be satisfied both that the proposed remedy will preserve competition and that it will not require additional conduct remedies to be effective.
In most cases, however, the assets will be divested after the transaction is consummated. Generally, the DOJ will require the merging parties to identify a package of assets to divest pursuant to a consent decree. Furthermore, the merging firms have to identify at least one acceptable purchaser for the package or convince the DOJ that the package will attract a purchaser who can effectively preserve competition. If the DOJ and the parties disagree over what assets should be included in a divestiture package, they may agree to a "crown jewel" provision, which requires the parties to include additional valuable assets if an appropriate purchaser cannot be found.
Once a package of assets is identified, the DOJ will impose certain measures to ensure the effective implementation of the remedy. While emphasizing the importance of a speedy divestiture, the DOJ will include a hold separate provision in the consent decree that requires the divestiture package to be maintained as a separate, distinct, and saleable entity. The DOJ may also appoint operating trustees if it thinks the merging parties have the ability and incentive to mismanage the divestiture assets in the interim. It may also appoint monitoring to ensure that the parties comply with the decree. If the merging parties fail to sell the divestiture package in the prescribed period, the DOJ may request a court to appoint a trustee to complete the sale. Finally, the DOJ must approve any proposed purchaser based on whether (1) the divestiture of the assets will not cause competitive harm, (2) the purchaser has the incentive to use the acquired assets to compete in the relevant market, and (3) the purchaser has "sufficient acumen, experience, and financial capability" to compete effectively in the long term.
Court Rejects Motion to Dismiss in DOJ-Blue Cross Blue
Shield Litigation Over Most Favored Nation Clauses
By Kimberley Biagioli and Alicia
Burns-Wright*
The U.S. District Court for the Eastern District of Michigan denied a motion to dismiss a complaint filed by the Antitrust Division of the Department of Justice (DOJ) and State of Michigan against a health insurance provider for including most favored nation (MFN) clauses in contracts with Michigan hospitals. In doing so, the court held that the complaint set forth a plausible claim that the contracts containing MFN clauses violate Section 1 of the Sherman Act and Section 2 of the Michigan Antitrust Reform Act by inhibiting competing insurance providers from obtaining competitive pricing for health care services.1
The complaint, filed in October 2010, states that Blue Cross Blue Shield of Michigan (Blue Cross) included MFN clauses in its contracts to purchase health care services from more than half of the acute-care hospitals across Michigan. The MFN clauses require the contracting hospital to provide health care services to Blue Cross' competitors at prices that are higher or no less than the price Blue Cross pays for the same services.2
The DOJ and State of Michigan allege that the MFN clauses harm competition in the market for the sale of commercial health insurance in Michigan by raising the costs for hospital services that competing insurance providers must pay. While a hospital may comply with the MFN clause by lowering the prices charged to Blue Cross, the complaint contends that this option imposes a significant penalty on the hospital because Blue Cross insures more than 60 percent of the state's commercially insured population. Instead, hospitals will opt to raise competing insurance providers' prices. This increase in costs that competing insurance providers must face diminishes their ability to effectively compete with Blue Cross and discourages new competitors from entering the market.3 Further, in exchange for the hospital agreeing to include the MFN clause in its contract, Blue Cross often agrees to pay more for the hospital's services than it would otherwise pay.4 This trade-off, according to the complaint, increases health care costs for both Blue Cross and its competitors, and puts upward pressure on prices that the insurers charge for health insurance. To remedy this effect, the complaint seeks an injunction to prevent Blue Cross from including MFN clauses in current and future contracts with hospitals in the state.
In its motion to dismiss filed in December 2010, Blue Cross challenged the DOJ's allegations and argued that the complaint failed to plausibly allege that the MFN clauses created adverse anticompetitive effects within the relevant product and geographic markets. The court disagreed, finding that the DOJ's description of the anticompetitive effects of the MFNs, including examples of how MFN clauses at various hospitals throughout Michigan will negatively impact competition, adequately set forth a plausible claim for relief under the Sherman Act and Michigan's antitrust statute.5 The court also noted that a market-by-market analysis is not required at the pleading stage and held that the complaint's description of the product and geographic markets was adequate to withstand a motion to dismiss.
The court rejected Blue Cross' argument that Michigan's regulation of the insurance industry means that Blue Cross is entitled to immunity under the state action doctrine, and that, as the state's insurer of last resort, Blue Cross is a quasi-public entity. This defense, if accepted by the court, would have meant that the federal government could not enforce the Sherman Act against Blue Cross due to the state's heavy participation in Blue Cross' business. In order to be protected from the application of the Sherman Act under the state action doctrine, the court stated that the MFN clauses must be clearly articulated and affirmatively expressed as state policy and actively supervised by the state itself.6 The court found no merit to Blue Cross' claims that its business is conducted sufficiently close to the state to be exempt from the governance of the Sherman Act. The state does not support the use of MFNs to stifle competition, nor possess the statutory right to review MFN clauses in contracts between hospitals and health insurers, according to the court's analysis.7 The court also determined that Blue Cross is a private — not quasi-public — entity because Blue Cross controls its own business decisions and has represented itself as a private entity in prior litigation.
For similar reasons, the court rejected Blue Cross's argument that it is exempt from liability because the Michigan Antitrust Reform Act does not apply to conduct that is specifically authorized under the laws of the state and conduct that is the subject of a legislatively mandated pervasive regulatory scheme. The court found that Blue Cross is not covered by these exemptions and, even if it was, would still be subject to the Act because the use of MFNs in particular is not protected by state or federal law.
In addition to this case, a class action suit has been filed against Blue Cross Blue Shield of Michigan alleging antitrust violations similar to those argued in the present matter8 and the United States has issued civil subpoenas to Blue Cross in six additional states.
District Court Denies Motion for Summary Judgment in
Groundbreaking Decision Regarding the Foreign Sovereign Compulsion
Defense Despite Chinese Government's Appearance as an
Amicus
By Robert Ritchie*
Judge Brian Cogan of the U.S. District Court for the Eastern District of New York rejected an argument on summary judgment that a group of Chinese vitamin C manufacturers were compelled by the Chinese government to fix prices for the export of vitamin C.9 By doing so, he allowed a putative antitrust class action against the manufacturers to move forward. The decision explored the contours of the foreign sovereign compulsion doctrine, taking a narrow view of its potency as a defense to antitrust liability. Notably, the decision rejected the arguments of China's Ministry of Commerce (the "Ministry"), which argued in support of the defendants in the Chinese government's first ever appearance before a U.S. court as an amicus.
In 2002, the Chinese government established an export regime for several products, including vitamin C, known as "Price Verification and Chop." The regime was to be administered by the Chamber of Commerce of Medicines and Health Products Importers and Exporters ("Chamber of Commerce"), an entity that the Chinese government had earlier established to serve as both a regulatory body and a private trade association. The defendants were members of the Chamber of Commerce and its subcommittee for importers and exporters of vitamin C. Pursuant to Price Verification and Chop, the subcommittee enacted an "industry-wide price agreement" for the export of vitamin C.10 Anyone wishing to export vitamin C would then have to submit its contract to the Chamber of Commerce, which would analyze the contract for conformity with the price agreement. Customs would prevent the export of products under contracts found not to be in conformity.
Before the implementation of Price Verification and Chop, the Chinese government had directed the Chamber of Commerce itself to establish mandatory minimum export prices for Vitamin C. The Chamber of Commerce enforced these mandatory minimum prices by suspending or revoking the violator's export license.11 The Price Verification and Chop regime thus relaxed the prior regime and was part of the Chinese government's overall transition from a command-and-control economy to a more market-based economy.
The regulations establishing the Price Verification and Chop regime made note of this. It referred to the subcommittee of Vitamin C manufacturers within the Chamber of Commerce as "a self-disciplinary industry organization . . . established on a voluntary basis."12 But though membership on the subcommittee was voluntary, compliance with its Price Verification and Chop procedures was not. Non-members of the Chamber of Commerce were also subjected to these procedures. Companies that did not comply could not export vitamin C and were subject to other penalties.13
In 2005, the putative plaintiff class filed the initial complaint in this case. In it they argued that the defendants — primarily made up of Herbei Welcome Pharmaceutical Co. Ltd.; Aland (Jiangsu) Nutraceutical Co., Ltd.; Northeast Pharmaceutical Co. Ltd.; and Weisheng Pharmaceutical Co. Ltd. — had conspired to fix prices of vitamin C in violation of Section 1 of the Sherman Act and Sections 4 and 16 of the Clayton Act. The defendants — and the Ministry in its amicus in support of the defendants' motions — did not dispute that the price agreements implemented by the Price Verification and Chop regime violated U.S. antitrust laws, save for one defense: that they were compelled by the Chinese government to fix prices. They argued that the description of the subcommittee of vitamin C manufacturers within the Chamber of Commerce as "a self-disciplinary industry organization . . . established on a voluntary basis" was misleading. Rather, they maintained, it referred to a regulatory system supervised by the Chinese government and enforced by penalties.14 As such, they argued that their actions should be shielded from liability under the foreign sovereign compulsion doctrine.
The foreign sovereign compulsion doctrine and the related doctrines of comity and act of state serve to protect foreign firms from, in Judge Cogan's colorful terms, being "placed between the rock of its own local law and the hard place of U.S. law."15 The judiciary has recognized that it would be unfair to impose liability upon a firm that had been compelled to act illegally by the command of a foreign sovereign.16 In response, it has employed these doctrines to protect a defendant from liability under U.S. antitrust laws when the defendant, by complying with U.S. antitrust laws, would subject himself to "the imposition of penal or other severe sanctions for refusing to comply with [a] foreign government's command."17
In this case, however, the court found several reasons why such a defense was inappropriate. For example, the court took issue with the fact that the Ministry never fully explained what penalties the government would subject the defendants to if they failed to comply with the Price Verification and Chop regime. Although it was clear that a defendant would not be able to export under a contract that failed to abide by an industry agreement, there was no evidence that the defendants would lose any rights if they declined to reach an agreement in the first place.18 For this reason, the court rejected the Ministry's argument that it required the defendants to be members of the subcommittee on pain of significant penalties.
Next, the court noted that the relevant law and regulations did not, on their face, indicate that the defendants were required to set prices above the market price.19 Although the Ministry argued that they were required to do so, the Chinese government's own testimony to the World Trade Organization in 2002 contradicted this assertion. China had testified to the WTO in 2002 that the regime was designed "to minimize the possibility of injurious dumping of Chinese exports by individual exporters."20
Finally, the court found it hard to believe that the defendants had been compelled to act when the actions in question were in their own economic self interest. The court observed "that a compulsory regime is unlikely to be present where the defendants' economic interest is in accordance with the allegedly compelled conduct."21 Because of this, Judge Cogan was less willing to defer to the Chinese government's interpretation of its own law, noting that "when the alleged compulsion is in the defendants' own self-interest, a more careful scrutiny of a foreign government's statement is warranted."22
The court thus denied the defendants' motion for summary judgment, noting that "[t]he Chinese law relied upon by the defendants did not compel their illegal conduct. Although the defendants and the Chinese government argue to the contrary, the provisions of Chinese law before me do not support their position, which is also belied by the factual record."23
In re Vitamin C Antitrust Litigation signals that the circumstances in which the foreign sovereign compulsion defense is applicable may be quite limited. How this case and similar ones fare going forward is worth watching. If Judge Cogan's approach is followed by other courts, the foreign sovereign compulsion doctrine will only be applicable in the rare cases in which a foreign sovereign has openly and explicitly ordered a firm to engage in anticompetitive behavior. This case may have very serious ramifications for Chinese exporters selling in the United States.
Administrative Law Judge Finds that North Carolina State
Board of Dental Examiners Violated FTC Act
By Sandeep Vaheesan
The Federal Trade Commission's (FTC) Chief Administrative Law Judge Michael Chappelle ruled that the North Carolina State Board of Dental Examiners (the "Board") engaged in unfair competition by classifying teeth-whitening services as dentistry and sending ceaseand- desist letters to non-dentists offering such services. The importance of this litigation is that the central issue was the scope of the state action doctrine, which has been of great interest to the FTC.
The Board is an agency of the State of North Carolina entrusted with regulating the practice of dentistry in the state. The Board issues and renews licenses and takes disciplinary actions against dentists who violate the Dental Practice Act (the "Act"). To practice legally in the state, a dentist must be licensed by the Board. Under the Act, the Board can bring an action in state court to enjoin the unauthorized practice of dentistry and also refer such matters to the district attorney for criminal prosecution. Its administrative powers, however, are confined to license applications and the conduct of licensees. The Board is comprised of six practicing dentists, one practicing dental hygienist, and one consumer member. The licensed members of the respective professions elect the six dentists and one hygienist on the Board, and the governor of North Carolina appoints the consumer member. The Act prohibits the hygienist and consumer members from participating in licensing decisions. Although not legally prohibited from participating, they were also excluded from participating in investigations into the unlicensed practice of dentistry.
The key issue in the case was whether the Board limited competition for teeth-whitening services. Teeth-whitening procedures remove stains and other discoloration from teeth. There are three principal types of teeth-whitening procedures: (1) bleaching and lightening, (2) dental prosthetics like caps and crowns, and (3) stain removal through mechanical polishing and special toothpastes. The conduct at issue related to bleaching and lightening of teeth. Judge Chappelle explained that there are four types of bleaching and lightening services and products: (1) dentist in-office teeth-whitening services; (2) dentist-provided take-home teeth-whitening products; (3) over-the-counter (OTC) teeth-whitening products; and (4) non-dentist teeth-whitening services in salons, retail stores, and mall kiosks. The prices of these products range from as little as $15 for OTC toothpastes to $400 or more for whitening performed by a dentist. Non-dentist teeth-whitening services are typically available for $75 to $150.
The case arose after numerous licensed dentists complained to the Board about non-dentists offering teeth-whitening services. In response, the Board sent cease-and-desist orders to non-dentists offering teeth-whitening services and to their suppliers and landlords. The letters said that the mall kiosks, salons, and other non-dentists that offered teeth-whitening services were engaged in the "unauthorized practice of dentistry." Some letters added that "[p]racticing dentistry without a license in North Carolina is a crime." The Board also sent a notice to the North Carolina Board of Cosmetic Art Examiners (Cosmetology Board) informing it that only licensed dentists can perform teeth-whitening procedures. The Cosmetology Board placed this notice on its website. Given the gravity of the consequences, recipients of the letter ceased to offer teeth-whitening services, terminated leases with retailers offering teeth-whitening services, and refused to supply non-dentists offering teeth-whitening services with the necessary products.
The Board argued that its conduct was immune from antitrust attack because it constituted state action. In a separate opinion from February 8, 2011, the FTC, however, ruled that the Board could not assert the state action doctrine to shield itself from liability under the FTC Act and other federal antitrust laws. The U.S. Supreme Court articulated the test for this immunity in Cal. Retail Liquor Dealers Ass'n v. Midcal. To qualify for this immunity, an entity must show that the challenged restraint is "(1) pursuant to a clearly articulated and affirmatively expressed state policy; and (2) actively supervised by the state itself." Municipalities and other extensions of the sovereign are exempt from the second prong of the state action test. The Commission, however, ruled that the Board is not the sovereign in this case and must satisfy the second prong. The Commission observed that dentists control the Board's decision-making process, and thus it is not sufficiently independent form the parties being regulated to act in the public interest. Applying the second prong of the Midcal test, the Commission ruled that the generic oversight provided by the State of North Carolina does not "substitute for the required review and approval of the 'particular anticompetitive acts' that the complaint challenges."
Following the loss on the state action doctrine defense, Judge Chappelle's decision focused the competitive effects of the Board's conduct. In doing so, Judge Chappelle applied the rule of reason. He defined the relevant geographic market as the State of North Carolina and the relevant product market as one-time teeth-whitening services, constituting only dentist and non-dentist in-office teeth whitening. OTC products were not included in the relevant market because they require repeat use and cannot offer immediate results. The Board was deemed to have market power in this relevant market because it has the ability to exclude competitors. Noting that Section 5 of the Federal Trade Commission Act encompasses Section 1 of the Sherman Act, Judge Chappelle then examined whether the Board is capable of "concerted action." He ruled that the Board members are independent economic actors capable of conspiring with each other. The six dentist members controlled the Board and had full-time dental practices. In addition, several of them had an economic interest in teeth-whitening services, and all of them represented member dentists who had an interest in this service.
Judge Chappelle ruled that the Board's conduct had anticompetitive effects. He found that the Board's cease-and-desist letters excluded non-dentist providers of teeth-whitening services and eliminated a lower-cost alternative to teeth whitening by dentists. He rejected all of the Board's procompetitive justifications for its conduct. The Board asserted that it was acting as a state licensing agency and protecting the citizens of North Carolina from the unauthorized practice of dentistry. Judge Chappelle said that this was a reframing of the state action immunity, which the FTC Commission had ruled was inapplicable in a separate opinion. The Board also contended that its cease-and-desist letters protected the public from cheaper and lower-quality teeth-whitening procedures. This justification was deemed invalid because it conflicts with the purpose of the Sherman Act, which favors unfettered competition irrespective of its effect on safety or quality. Lastly, the Board argued that it was "protect[ing] legal competition within the marketplace." Judge Chappelle also rejected this defense, finding that no court in North Carolina had held teeth whitening by a non-dentist to be illegal.
Recent Decisions Shed Light on the FTAIA
By Yousri Omar
The Foreign Trade Antitrust Improvements Act (FTAIA), enacted in 1982, was meant to provide clarification on the applicability of the Sherman Act to foreign commerce. The FTAIA was also supposed to protect American exporters from being unfairly subjected to trade restrictions not faced by their international competitors. Whether the FTAIA has been successful in protecting American exporters is debatable, but as for providing clarity on the application of the Sherman Act to foreign commerce, few would argue that the statute comes close. In fact, the U.S. Court of Appeals for the Third Circuit has gone so far as to describe the law as using "rather convoluted language" and being "inelegantly phrased."24 As such, companies must rely on the courts to provide the clarity so desperately needed in interpreting and understanding how the FTAIA may reach their foreign conduct. Two recent decisions in the Third and Seventh Circuits help delineate the scope and applicability of the FTAIA.
The FTAIA provides that 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 Sherman Act].25
However inelegantly phrased, courts have recognized that the FTAIA provides two important exceptions to the general rule that the Sherman Act does not apply to foreign commerce. The FTAIA makes the Sherman Act applicable (1) to foreign anticompetitive conduct involving U.S. import trade or import commerce, or the "import commerce exception," and (2) foreign anticompetitive conduct that has a direct, substantial, and reasonably foreseeable effect on U.S. domestic or import trade or commerce, or the "direct effects exception."
Since Congress passed the FTAIA in 1982, there has been uncertainty as to whether it was intended to create a jurisdictional bar to be applied by courts at the outset of a matter or a substantive merits limitation. Courts have also endeavored to clarify the meaning and applicability of the import commerce and direct effects exceptions. The Third Circuit in Animal Science Products, Inc. v. China Minemtal Corp.,26 and the Seventh Circuit, in Minn-Chem, Inc. v. Agrium Inc.,27 offer significant guidance on whether the FTAIA is indeed jurisdictional, and the application of the two exceptions.
The FTAIA Provides a Substantive Element of a Sherman Act Claim, Not a Jurisdictional Limit
Precedent in both circuits provided that the FTAIA imposed a jurisdictional limit, but the Third Circuit, in the face of recent U.S. Supreme Court decisions, reversed its prior precedent and the Seventh Circuit clearly indicated that it would be inclined to do the same if faced with the issue. Both courts relied on the U.S. Supreme Court's decisions in Arbaugh v. Y&H Corp.28 and Morrison v. National Australia Bank Ltd.29 for the bright-line rule that courts should apply a jurisdictional test to a statute only when Congress clearly, explicitly, and specifically articulates one.
In Animal Science Products, the Third Circuit noted that Congress did not specifically articulate a jurisdictional limit in the FTAIA and in fact, "the statutory text is wholly silent in regard to the jurisdiction of the federal courts."30 As such, the Third Circuit reversed the trial court decision which, following circuit precedent, held that the FTAIA was jurisdictional.
The Seventh Circuit, though it did not actually decide whether the FTAIA was jurisdictional, did "note the issue and reserve it for another day." In United Phosphorous, Ltd. v. Angus Chemical Co., an en banc panel of the Seventh Circuit held that the FTAIA established a jurisdictional bar to claims for foreign anticompetitive behavior under the Sherman Act. In Minn-Chem, the Seventh Circuit recognized that the Supreme Court's approach in Arbaugh and Morrison more closely paralleled the dissent's opinion in United Phosphorous. The court did not go as far as to reverse United Phosphorous, because it found that the suit was barred by the FTAIA for failing to state a claim upon which relief could be granted.
The Third Circuit decision may have a significant impact on how FTAIA cases are litigated in the future. If the FTAIA does not impose a jurisdictional bar, plaintiffs will no longer have the burden of establishing jurisdiction. To successfully defend against FTAIA claims, defendants now will have the initial burden of showing that the claims are insufficient on their face in a motion to dismiss. Importantly, this means that courts will accept all allegations in a complaint as true and not examine the credibility of those allegations.
The Import Commerce Exception Requires Conduct Directly Targeting at Import Markets
Both Animal Science and Minn-Chem provide guidance as to the scope and application of the import commerce exception. Both circuits noted that the exception requires strict construction in order to give meaning to the direct effects exception. The Seventh Circuit held that simply being an importer who engaged in anticompetitive behavior abroad was insufficient under the import commerce exception. The Third Circuit held that, while being an importer may be relevant to the import commerce exception, it was not a necessary prerequisite. Both courts agree that the relevant inquiry under the import commerce exception is whether the alleged anticompetitive behavior was directed or targeted at import commerce.
In Minn-Chem, the lower court held that the import commerce exception applied because plaintiffs alleged that defendants were actual importers and were generally accused of conspiring to fix prices internationally. The Seventh Circuit found this interpretation to be in error and reversed the lower court's decision. Specifically, the court noted that the district court's interpretation would render the direct effects exception meaningless if any importer of goods who engaged in anticompetitive conduct outside of the U.S. would be subject to the Sherman Act, regardless of the impact on the U.S. market. The court held that for a claim to be sufficient under the import commerce exception the conduct at issue must actually and directly involve the U.S. market. It is not sufficient for the defendants to be merely engaged in the import market.
Because the plaintiffs in Minn-Chem, failed to allege any specific conduct aimed or targeted at the U.S. import market, but rather generally alleged that the defendants engaged in anticompetitive behavior in Brazil, China, and India, the Seventh Circuit found that the complaint was insufficient as to the import commerce exception. The court noted that the plaintiffs alleged that the defendants conspired to coordinate prices abroad in an effort to fix and stabilize U.S. prices, but that the complaint did not contain any specific factual allegations as to how defendants achieved this. Because this allegation was nothing more than a mere recitation of a necessary legal element without any factual substantiation, the court found it insufficient.
In Animal Science, the district court held that for the import commerce exception to be applicable, defendants actually had to function as importers of goods. The Third Circuit, however, reversed, holding that while being an importer "may satisfy the [import commerce exception] . . . it is not a necessary prerequisite." The anticompetitive behavior at issue need only be directed at import commerce.
Both decisions make clear that for the import commerce exception to apply, the conduct at issue must actually target import commerce. Whether the defendant is actually an importer, though relevant to the analysis, is not dispositive either way.
The Direct Effects Exception is an Objective Test Requiring Immediate Domestic Consequences of Foreign Anticompetitive Behavior
Both Animal Science and Minn-Chem provide important direction on the meaning and application of the direct effects exception as well. In Animal Science, the Third Circuit made clear that the FTAIA's direct effects exception imposes an objective standard. In other words, for foreign anticompetitive behavior to be subject to the direct effects exception, the conduct must have had direct and substantial effects in the domestic market that would have been foreseeable to an objectively reasonable person. The exception does not require actual subjective intent on the part of the defendant to affect U.S. import commerce.
Where Animal Science helped clarify the requisite standard to be applied, it did little to elaborate on what constitutes a direct, substantial, and reasonably foreseeable effect; a question that Minn-Chem endeavored to answer. In Minn-Chem, the Seventh Circuit, borrowing from a 2004 Ninth Circuit decision,31 found that, for an effect to be direct, it must follow as an immediate consequence of the defendant's activity. As such, if an effect depends on "uncertain intervening developments" it cannot be direct and is insufficient under the direct effects exception.
The complaint in Minn-Chem alleged significant anticompetitive behavior abroad, but failed to tie that behavior into a specific effect in the U.S. that resulted from it. Specifically, the plaintiffs alleged anticompetitive behavior such as price fixing and parallel output production in China, India, and Brazil. The plaintiffs further alleged that products are first sold in those three markets, and the prices established there are used as a benchmark for U.S. prices. The Seventh Circuit, however, found that the plaintiffs' allegations were not sufficiently detailed as to how prices in foreign markets directly and substantially affected U.S. prices. The connection between the foreign conduct and the U.S. market cannot be speculative and indirect. Simply alleging a global market where anticompetitive behavior abroad will eventually have a ripple effect on the U.S. market is not enough.
Conclusion
The Animal Science and Minn-Chem decisions provide clarification and guidance on the FTAIA. First, it is clear that in light of recent Supreme Court precedent, courts that have the opportunity to review whether the FTAIA poses a jurisdictional bar likely will hold that FTAIA is not jurisdictional. Second, for the import commerce exception to apply, the anticompetitive behavior at issue must be directly targeted at U.S. imports. Simply being an importer, though relevant, is not dispositive. Third, the direct effects exception is an objective standard that requires an actual and direct effect on U.S. commerce that cannot be predicated on intervening circumstances.
* Sat for Bar July 2011; results pending.
* Sat for Bar July 2011; results pending.
Footnotes
1 United States of America and State of Michigan v. Blue Cross Blue Shield of Michigan, No. 10-14155, 2011 WL 3566486 (E.D.Mich. Aug. 12, 2011) (Order Denying Motion to Dismiss).
2 Id. at *1.
3 Id. at *3-4.
4 Id. at 3.
5 Id. at *12-13.
6 Id. at *8.
7 Id. at *9-10.
8 The case is Veneberg v. Blue Cross Blue Shield of Mich., No. 2:10-cv- 14360, in the Eastern District of Michigan.
9 In re Vitamin C Antitrust Litigation, No. 06-MD-1738 (E.D.N.Y. Sept. 6, 2011).
10 Id. slip op. at 9.
11 Id. at 7-8.
12 Id. at 11.
13 Id. at 12.
14 Id. at 16.
15 Id. at 2.
16 Mannington Mills, Inc. v. Congoleum Corp., 595 F.2d 1287, 1293 (3d Cir. 1979).
17 In re Vitamin C, slip op. at 35.
18 Id. at 57.
19 Id. at 60.
20 Id. at 61.
21 Id. at 46-47.
22 Id.
23 Id. at 2.
24 Turicentro, S.A. v. Am. Airlines Inc., 303 F. 3d 293, 300 (3d Cir. 2002).
25 15 U.S.C. § 6A.
26 2011 U.S. App. LEXIS 17046 (3d Cir. 2011).
27 2011 U.S. App LEXIS 19433 (7th Cir. 2011).
28 546 U.S. 500 (2006) (holding that the numerical qualification contained in Title VII's definition of employer does create a subject-matter jurisdiction test).
29 130 S. Ct. 2869 (2010) (finding that the extraterritorial reach of § 10(b) of the Securities and Exchange Act of 1934 did not create a subject-matter jurisdiction test but rather was a merits question).
30 Animal Science Products, Inc., 2011 U.S. App. LEXIS at 15.
31 United States v. LSL Biotechs., 379 F.3d 672, 680 (9th Cir. 2004) (adopting the Supreme Court's interpretation of direct in the Foreign Sovereign Immunities Act).
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