Today, we’re continuing the prologue of our tour through the law of the Foreign Trade Antitrust Improvement Act, surveying the antitrust law of foreign-based transactions in the years leading up to enactment of the FTAIA. In our first installment, we reviewed the Supreme Court’s decision in American Banana Co. v. United Fruit Company, 213 U.S. 347 (1909), where the Court held that an antitrust conspiracy to take actions overseas was not within the reach of the Sherman Act, even when the conspiratorial agreement was reached within the U.S. The cases following American Banana showed both the Supreme Court and lower courts backing away from that hardline position, gradually rendering American Banana largely a dead letter. Today, we review the rest of the major cases involved in that evolution.
United States v. Aluminum Co. of America, 148 F.2d 416 (2nd Cir. 1945) – Alcoa involved allegations by the Justice Department that Alcoa and many of its international subsidiaries had monopolized both interstate and foreign commerce in the manufacture and sale of “virgin” aluminum ingot, and had joined in a conspiracy in restraint of such commerce with another defendant, Aluminum Limited.
Aluminum is never found in a pure state – it is always chemically bonded with oxygen. Until the late 1880s, it was never commercially practicable to separate the aluminum from the oxygen. An inventor identified a method of doing so in the late 1880s and assigned the patent to Alcoa. A few years later, a different inventor discovered a process by which aluminum smelting could be done without external heat. In October 1903, Alcoa became the exclusive licensee of that second process in return for a promise to sell a stated amount of aluminum to the patent assignee for a 10% discount. Meanwhile, according to the complaint, Alcoa entered into contracts with various power companies to supply the power needed to complete the manufacturing process. The contracts allegedly included in several cases covenants that the power company would not sell power to any third party for the manufacture of aluminum. Finally, Alcoa allegedly entered into four successive cartels with foreign manufacturers agreeing to limit its imports into their non-U.S. markets in return for a promise that the foreign manufacturers would not import into the United States or would do so under restrictions. The Justice Department first sued Alcoa in 1912, and the lawsuit ended with a decree finding various covenants entered into by the company unlawful and enjoining their performance. In 1937, the Justice Department sued Alcoa again, alleging that essentially the same kinds of conduct had continued even after the 1912 decree. Following a nearly two-year long trial involving more that 40,000 pages of testimony, the district court found for defendants and dismissed the complaint. The government’s petition for an appeal from the judgment was granted (only a day after it was filed), but nearly two years later, the Supreme Court entered an order noting that sufficient Justices had recused themselves that the Court was unable to produce the necessary quorum of six to hear the case. So the case was assigned to the Second Circuit, functioning as the court of last resort under 15 U.S.C. 29.
Defendant Aluminum Limited was formed in 1928 to take over the properties of Alcoa outside the United States. All common shares in Limited were issued to the common shareholders of Alcoa. Effectively controlling interests in both companies were owned by a very small number of people. In 1931, Limited jointed five other non-U.S. companies to form a Swiss corporation they called the “Alliance.” The 1931 agreement provided that the Alliance would from time to time fix a quota of production for each share in the company, and each shareholder would be limited to that quota in sales. All shareholders were barred from buying or selling aluminum to anyone not in the group without the consent of the directors. The agreement also provided that members could exceed their quota to the extent that the member converted ores delivered to him in the U.S. or Canada by persons situated in either country into aluminum. In 1936, the members of the Alliance entered into a new agreement providing that each member who exceeded production quotas for the year should pay a graduated royalty which would be divided among the shareholders.
The question for the Court was whether the agreements of 1931 or 1936 among the Alliance members violated the Sherman Act, notwithstanding the fact that they were entered into overseas by (for the most part) foreign nationals. Under American Banana, the answer would have been simple – no. But by 1945, it was “settled law” that “any state may impose liabilities, even upon persons not within its allegiance, for conduct outside its borders that has consequences within its borders which the state reprehends.” The court concluded that since the agreements “would clearly have been unlawful” if they had been made within the United States, they were likewise illegal in this case if they were intended to affect imports and did affect them. Since the 1936 agreement was expressly intended to affect U.S. imports, the first half of that two-prong test was satisfied. The second half – an actual effect on imports – was satisfied too, since any restraint reducing supply was presumed to affect prices.
United States v. Timken Roller Bearing Co., 83 F.Supp. 284 (N.D. Ohio 1949) & Timken Roller Bearing Co. v. United States, 341 U.S. 593 (1951) – Timken involved allegations three companies – an American, a British and a French company – had entered into various agreements intended to eliminate all competition between themselves and with others in the market for anti-friction bearings worldwide. These agreements had purportedly been made as early as 1909 and been modified and extended repeatedly since. The agreements purportedly divided up the market, barring parties from selling into the territory of another participant and fixing the price which the party must sell at if he did so. The district court found that the agreements to divide up the worldwide markets and eradicate competition among the parties plainly violated the Sherman Act. The court summarily rejected the claim that the Sherman Act could not reach the agreements because they were made overseas. The agreements “had a direct and influencing effect on trade in tapered bearings between the United States and foreign countries,” and that was that.
The defendant appealed directly to the Supreme Court. On appeal, the defendants insisted that the cartel agreements were the only way they could compete successfully in foreign markets. The Supreme Court made short shrift of the argument, holding that the Sherman Act was based on the proposition that both export and import trade were possible and desirable – a proposition that was “wholly inconsistent” with the view that free foreign commerce in goods must be sacrificed to promote the export of American capital for investment in foreign factories to sell abroad.
Steele v. Bulova Watch Co., 344 U.S. 280 (1952) – Although Steele was not an antitrust case, it illustrates how far the Supreme Court had come in demolishing American Banana. According to the complaint, the petitioner was a long-time resident of San Antonio, Texas who first entered the watch business in 1922. Four years later, he learned of the defendant’s trademark on its nationally-distributed watches. The petitioner picked up and moved his business to Mexico City, where he discovered that the defendant had not registered its trademark in Mexico. The petitioner obtained the Mexican registration and began manufacturing watches using parts imported from Switzerland and the United States. When the defendant began receiving numerous complaints about spurious watches with their trademark, they sued him under the Lanham Act.
It made no difference for jurisdictional purposes that most of the petitioner’s actions had taken place on foreign soil – the petitioner was an American citizen, and his alleged conduct had an effect on U.S. commerce, both in the form of his watches filtering across the border and his purchases of components in the U.S.
Although the Court purported to distinguish American Banana in Steele, it all but abandoned the earlier holding. The rule of American Banana was never intended to confer blanket immunity on conduct on foreign soil which radiated effects into the United States, according to the Supreme Court. “Unlawful effects in this country . . . are often decisive.”
Continental Ore Co. v. Union Carbide and Carbon Corp., 370 U.S. 690 (1962) – Continental Ore involved allegations that the defendants had attempted to monopolize the market in ferrovanadium and vanadium oxide. Vanadium oxide is produced by mills near the mines where vanadium ore is produced, and through a further process, vanadium oxide is converted into ferrovanadium. According to the complaint, the defendants had either bought or acquired control over virtually all the vanadium deposits in the U.S. and virtually all the vanadium oxide produced by others here. They had then refused to sell vanadium oxide to other producers of ferrovanadium, as well as dividing up the market among themselves and fixing prices for the purchase and sale of ore, vanadium oxide and ferrovanadium. According to the plaintiff, by 1949, the defendants were producing over 99% of the ferrovanadium in the U.S. and over 90% of the vanadium oxide and were accounting for more than 99% of the nationwide sales of both. As a result, other producers were allegedly driven out of business. The plaintiff’s fundamental claim was that as a result of the defendants’ control over the market, they were unable to find sufficient supplies of vanadium oxide to compete.
Our interest in Continental, however, flows from their claim that the defendants conduct had effectively destroyed their business selling ferrovanadium in the Canadian market. The plaintiff introduced evidence that it had sold products to a Canadian customer throughout 1942. However, in January 1943, it learned that a new allocation system in Canada had eliminated the plaintiff from the Canadian market. The complaint alleged that a wholly owned subsidiary of the defendant had been named exclusive purchasing agent for the Metals Controller for the Canadian government – the sole party authorized to import ferrovanadium into Canada – and at the defendant’s behest, eliminated the plaintiff from the market.
The defendant argued that American Banana shielded them from liability, but that argument went nowhere: “A conspiracy to monopolize or restrain the domestic or foreign commerce of the United Stats is not outside the reach of the Sherman Act just because part of the conduct complained of occurs in foreign countries.” Further, citing Sisal Sales Corp. (see our previous post in this series), it made no difference that the alleged conspiracy involved some acts by an agent of a foreign government.
Todhunter-Mitchell & Co., Ltd. v. Anheuser-Busch, Inc., 383 F.Supp. 586 (E.D. Pa. 1974) – The defendant in Todhunter-Mitchell tried yet again to resuscitate American Banana, with no luck. The plaintiff there was a Bahamian corporation which engaged in wholesale distribution of liquor and beer in the Bahamas. One of Todhunter’s principal competitors was Bahama Blenders, which was the exclusive authorized distributor for the defendant’s beer in the Bahamas. The plaintiff allegedly tried to buy the defendant’s beer from its wholesalers in Miami and New Orleans for importation and resale in competition with Bahama Blenders, but was prevented from doing so by resale restrictions imposed by the defendant, the purpose of which was to prevent any price competition in the sale of defendant’s beers in the Bahamas. The defendant cited American Banana, but the court commented that “subsequent cases” had made it clear that the 1909 decision didn’t apply to situations where the conduct of the defendant had “an impact within the United States and its foreign trade.” Since the defendant’s alleged resale restrictions had made sales from Miami and New Orleans to the plaintiff impossible, it was a direct restraint on commerce between the United States and the Bahamas, and the Sherman Act applied.
Timberlane Lumber Co. v. Bank of America, 549 F.2d 597 (9th Cir. 1976) – In one of the last major foreign-commerce decisions before the FTAIA was enacted, the plaintiffs here alleged that the defendant and others, located both in the U.S. and Honduras, had conspired to prevent the plaintiff from milling lumber in Honduras for export to the United States, thus supposedly keeping control of the Honduran lumber export business in the hands of parties allegedly financed and controlled by the defendant. The plaintiffs were an U.S. based partnership engaged in the importation and domestic distribution of foreign lumber and two Honduran corporations principally owned by general partners of the U.S. based party. The district court dismissed on the grounds that the activities complained of had happened in Honduras and based on the act of state doctrine (since crucial steps in the alleged conspiracy had occurred in the context of court actions in Honduras).
The story of Timberlane begins with the bankruptcy of a Honduran lumber mill owned by a third party. Not long after, the plaintiffs were seeking alternative sources of lumber for delivery to its U.S. distribution system and settled on Honduras. The plaintiffs formed a Honduran subsidiary, acquired forest land and started buying log-processing equipment. The plaintiffs learned that the third-party’s former mill might be available, so they formed a second Honduran subsidiary and managed to buy a share of the mill from former employees who had acquired it in the bankruptcy.
The problem was that the employees’ share wasn’t all of the mill. Yet another third party (who plaintiffs alleged was the “front man” for the defendants’ scheme) acquired the remaining interests in the mill, which were owned by the defendant and a competing mill. The “front man” then went to court in Honduras to enforce those interests through attachment. In Honduran law, what U.S. lawyers would call an attachment is known as an “embargo,” which precludes sale of the property without a court order. In addition, a judicial officer known as an “interventor” is appointed to ensure that the value of the property won’t decrease. The “front man” got embargoes on both of the plaintiffs’ Honduran subsidiaries. The interventor – who was supposedly on the defendant’s payroll – allegedly used guards and troops to cripple the plaintiffs’ Honduran operation.
After rejecting the defendants’ “act of state” doctrine defense, the Ninth Circuit turned to the question of applying the Sherman Act to the almost exclusively Honduran conduct at issue. The court immediately recognized that American Banana was a dead letter. If U.S. antitrust law could reach some but not all foreign activity, what was the test for determining jurisdiction? The district court in Timberlane had required a “direct and substantial effect” on U.S. foreign commerce. An important commentator suggested a “direct or substantial effect” test. Another commentator advocated a test of whether the conduct “substantially affects” either foreign or interstate commerce. The Ninth Circuit commented that nobody seemed to really know how “substantial” an effect had to be or what the “direct-indirect” distinction meant. Ultimately, the Ninth Circuit settled on a three-part test: “Does the alleged restraint affect, or was it intended to affect, the foreign commerce of the United States? Is it of such a type and magnitude as to be cognizable as a violation of the Sherman Act? As a matter of international comity and fairness, should the extraterritorial jurisdiction of the United States be asserted to cover it?” Since the district court had addressed only the impact on U.S. commerce, the Ninth Circuit vacated and remanded.
Join us back here in two weeks as we review the legislative history of the Foreign Trade Antitrust Improvement Act.