Seventh Circuit Sets Forth Elements for a Claim to Meet FTAIA
On June 27th, 2012, the 7th Circuit established elements extending the reach of United States antitrust law to certain cases where foreign companies engage in anticompetitive conduct outside the United States. (Minn-Chem, Inc., et al., v. Agrium Inc., No. 10-1712, slip op. (7th Cir. June 27, 2012)).
In Minn-Chem, indirect U.S. potash purchasers alleged price-fixing and other antitrust conduct between potash suppliers. Because potash (minerals and salts used mainly in agricultural fertilizers) is a homogeneous commodity, a buyer will choose amongst suppliers largely based on price. Seventy one percent (71%) of the world’s potash market is dominated by seven international entities that allegedly restrained the global supply of potash allowing for the entities to inflate prices.
The alleged international cartel would first negotiate prices with customers in Brazil, India, and China before using those prices as a standard figure to sell to U.S. customers. Successfully initiating this practice in 2003, potash prices increased 600% in 2008 while demand for potash remained the same, and even slightly declined in the United States. The high prices of potash remained even though fertilizer prices declined. Allegations against the members of the cartel also include collective restricted output to maintain unnecessarily high prices and joint ventures to facilitate such coordination.
Defendant Moved to Dismiss Complaint
The defendant potash suppliers moved for dismissal on the grounds that the complaint failed to meet the requirements of the Foreign Trade Antitrust Improvements Act of 1982 (“FTAIA”). The 7th Circuit initially found that the complaint failed to meet the FTAIA, but upon rehearing the case en banc the court denied the defendant’s motion.
FTAIA provides that foreign commerce may fall under the Sherman Act if it has a “direct, substantial and reasonably foreseeable” adverse effect on American commerce. 15 U.S.C. Section 6a. In determining whether a plaintiff is able to bring a claim under FTAIA, the 7th Circuit previously held in that the issue is the jurisdictional limit of the court. (United Phosphorus v. Angus Chemical 322 F.3d 942, 952 (7th Cir. 2003)). However the 7th Circuit overturned their United Phosphorus ruling in Minn-Chem Inc. by adopting the Supreme Court’s view in Morrison v. National Australia Bank Ltd. (130 S. Ct. 2869 at 2877 (2010)). In Morrison, the Supreme Court ruled that the reach of the Securities Exchange Act is determined by asking what conduct is prohibited, which is a question of the merits of the case. The 7th Circuit used the same reasoning to find that FTAIA establishes an “element of an antitrust claim, not a jurisdictional limit on the power of the federal courts.”
7th Circuit’s Decision
In Minn-Chem, the 7th Circuit interprets the FTAIA’s standards and sets forth elements under which the Sherman Act would apply to foreign conduct thus allowing such a complaint to survive a motion to dismiss for failure to state a claim. Where the FTAIA applies, commercial activities abroad will be outside the reach of the Sherman Act, unless they adversely affect imports to the United States. Essentially, the 7th Circuit ruled that the FTAIA will bring foreign commerce back under the Sherman Act if two criteria are met: 1) the foreign conduct involving trade or commerce must have a “direct, substantial, and reasonably foreseeable effect” on either U.S. domestic commerce or U.S. import commerce, or the export trade or commerce of a U.S. exporter (exporting was not at issue in the Minn-Chem case, therefore was not discussed by the Court), and 2) “direct, substantial and foreseeable effect must give rise to a substantive claim under the Sherman Act.”
Under the first element, the actions of the international cartel clearly involved foreign conduct affecting U.S. commerce. 5.3 million tons of potash was imported into the U.S. in 2008, and the majority of that potash was supplied by members of the international cartel. In defining “direct, substantial and reasonably foreseeable effect,” the 7th Circuit adopted the Department of Justice’s definition of “direct effect” meaning a reasonably proximate cause. The FTAIA excludes foreign activities from falling under the Sherman Act if they are too remote from the effect on U.S. commerce. The 7th Circuit reasoned that a “substantial effect” was met in this case by the large amount of potash supplied to the U.S. by the international cartel, and the resulting 600% price increase from 2003 to 2008. The Court also found that the foreseeability requirement is also met because it is logical and expected that an international cartel controlling 71% of the world’s potash to charge uniform, supracompetitive prices.
Addressing the second element, and whether the claim falls under the Sherman Act, the Supreme Court has consistently held that the Sherman Act covers imports that have “actual and intended effects on U.S. commerce,” (Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993)) and where “foreign conduct [produces] a substantial intended effect in the United States.” The 7th Circuit found in Minn-Chem that the U.S. potash import has been “substantially and intentionally affected by [the] anti competitive [arrangements]” of the cartel, and the foreign conduct is harming U.S. commerce.
In Minn-Chem, the 7th Circuit found that the price increase in foreign potash markets from the cartel’s reduction in supply, resulted in almost immediate increase in the price of U.S. imports. Further, the cartel established benchmark prices in other markets where they had more freedom to operate and subsequently applied those prices to increase prices in the United States. Because both elements under FTAIA are fulfilled, the 7th Circuit found that the complaint properly states a claim that brings the foreign conduct of the international cartel under the Sherman Act through the FTAIA. Thus, the court found that the complaint should not be dismissed under FRCP 12(b)(6).
The Minn-Chem ruling establishes elements that a complaint alleging foreign conduct in violation of U.S. antitrust laws must meet in order to be heard in federal court. In dicta, the 7th Circuit clarified that under its interpretation of the FTAIA, foreign companies that “do not meet the threshold for “effects” on import or domestic commerce,” will not be subject to Sherman Act violations regardless of foreign conduct that may impact U.S. commerce.