Meeting the Pleading Requirements of the Foreign Trade Antitrust Improvements Act in a Post-Twombly World
Business & Commercial Litigation Alert
Enacted in 1982, the Foreign Trade Antitrust Improvements Act, 15 U.S.C. § 6a (the “Act”), attempted to clarify the applicability of the Sherman Act, 15 U.S.C. §1, to international business transactions. At its heart, the Act is a jurisdictional statute. It limits the power of United States courts to hear and determine disputes involving “non-import” foreign commerce unless certain limited exceptions are met. Ironically, although it was intended to clarify then-existing case law, the Act’s language is cumbersome, inelegant, and opaque, and its meaning has required development through subsequent case law. Compounding that irony is the dearth of published opinions applying the statute. The decision in Animal Science Prods, Inc. v. China Nat’l Metals & Minerals Import and Export Corp., No. 05-4376 (D.N.J. Dec. 30, 2008), provides some much needed guidance in this field and serves as a clear reminder of the challenges facing a domestic plaintiff suing a foreign defendant under the Sherman Act.
In Animal Science, two domestic corporations filed a class-action complaint against sixteen China-based mineral-trading companies and one New Jersey-based affiliate, alleging that the defendants and others conspired to fix the prices of magnesite and related products. The plaintiffs alleged that they had purchased the products at supra-competitive levels as a result of the alleged conspiracy. Relying on Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007), but not the Act, the domestic defendant moved to dismiss the case under Rule 12(b)(6). Raising on its own the question whether the Act applied to the plaintiffs’ alleged Sherman Act claim, the court dismissed the case.
According to the Animal Science court, the Act raises three questions for a court to address when determining whether a Sherman Act claim brought against a foreign defendant is viable:
- The threshold question is whether the alleged conduct involves “import trade” or “import commerce.” In other words, did the foreign defendant bring goods or services into the United States, i.e., was the defendant an actual importer of goods into the United States? If so, then the Act does not apply, the claim falls within the scope of the Sherman Act, and the case may proceed.
- If the conduct does not involve “import trade” or “import commerce,” then the next question is whether the alleged conduct involves commerce or trade with a foreign nation. In other words, was the foreign defendant’s conduct directed at a foreign market or was it limited to its own domestic market? If the defendant’s conduct cannot be characterized as foreign trade or commerce, the court lacks subject matter jurisdiction over an alleged Sherman Act claim based on that conduct, even if the conduct causes “ripple effects” felt in the United States.
- If the conduct involves trade or commerce with a foreign nation, then the third and last question is whether the alleged conduct caused a “direct, substantial and reasonably foreseeable effect” on the United States market. If so, then the federal court has subject matter jurisdiction to determine the merits of the plaintiff’s Sherman Act claim against the foreign defendant.
Animal Science at **45-48.
In Animal Science, the plaintiffs alleged that six of the sixteen China-based members of the cartel exported magnesite into the United States. In addition, they alleged that each of the defendants “directly and through affiliates that they dominate and control in this country and outside the United States, is engaged in the business of manufacturing and selling magnesite and magnesite products in the United States and throughout the world.” Id. at *38.
These allegations were not enough, however, for the Animal Science court. Stringently applying Twombly, the Animal Science court found that the plaintiffs failed to plead facts sufficient to characterize the defendants’ conduct as involving import trade or commerce. The plaintiffs did not allege sufficient facts showing that any of the defendants actually imported magnesite into the United States. The court went so far as to reason that the plaintiffs’ references to “affiliates” and to the conduct of business “throughout the world” allowed for a presumption that none of the defendants actually imported magnesite into the United States. Id.
Finding that the plaintiffs had alleged facts to support the conclusion that at least some of the defendants were engaged in trade or commerce with a foreign nation, id. at *40, the Animal Science court turned its attention to whether the plaintiffs adequately pleaded facts showing that the alleged anticompetitive conduct had a “direct, substantial, and reasonably foreseeable effect” in the United States. The court grouped the plaintiffs’ allegations of causation into three general categories: cost of production, currency and sale price, and economic. The court found each category of allegations insufficient to support a causal link between the alleged illegal conspiracy and antitrust impact in the United States.
First, the court examined the plaintiffs’ view that the defendants’ lower costs of production should have benefited, but did not benefit, the United States market. Id. at 42. The court found that anticompetitive activity cannot be based simply on allegations that a defendant should have sold its goods at a lower price because it enjoyed lower costs of production. Id. at *43. A company, the court observed, is under no obligation to pass its cost-savings to its customers in the form of lower prices. Id. at *44.
The Animal Science court also rejected the plaintiffs’ argument that the defendants enjoyed an unlawful competitive advantage due to the value of Chinese currency against the U.S. dollar. Indeed, the court found it nothing more than another “expression of [the plaintiffs’] disappointment with the fact that the world prices on [the defendants’ magnesite products] were not lower than they actually were,” (i.e., that the defendants should have made less profit by selling their goods cheaper than they were). Id. at *48.
Lastly, the district court addressed the plaintiffs’ allegations that, in defiance of the “laws of supply and demand,” magnesite prices remained stable or increased despite low demand. Id. at *49. The court also found that this allegation, if true, would not support an inference of illegal activity because low demand does not mean that all producers will decrease their prices. According to the Animal Science court, only the producers in the higher price brackets would be required to reduce prices when demand drops. Id. Producers in the lower price brackets may continue to maintain—or even increase—their prices until demand drops to a point where even they must reduce their prices to sell their goods. Id. Again, since there is no necessary connection between low demand and a producer’s price, the fact that the defendants’ prices did not drop when demand was low does not support an inference of illegal activity.
Having found that none of the plaintiffs’ allegations linked the defendants’ alleged unlawful activities to United States trade and commerce, the court concluded that the complaint failed to allege a direct, substantial, and foreseeable effect in the United States and dismissed it for lack of subject matter jurisdiction. The alleged fact that prices were increasing throughout the world (including the United States) does not support the suggestion of an illegal conspiracy harming the U.S. market. Id. at *52. As the Animal Science court put it: “‘the direct, substantial and reasonably foreseeable effect’ element of the [Act] cannot be pled by a mere expression of [the plaintiffs’] disappointment with the world’s pricing tendencies.” Id.
Lessons from Animal Science
To avoid dismissal at the pleading stage for lack of subject matter jurisdiction, a plaintiff seeking to prosecute an antitrust claim that involves foreign conduct must plead facts sufficient to show that the alleged conduct was not carved out of the Sherman Act by the Act. More particularly, if the conduct at issue involves import trade or commerce (and thus is not covered by the Act), the plaintiff should plead specific and detailed facts reflecting that the defendant sold and delivered goods and services in the United States. General statements that the defendant sold its goods and services throughout the world, including the United States, may not pass muster. In addition, when asserting a price-fixing claim, it may not be sufficient to allege that prices increased despite lower costs or lower demand. Additional facts suggesting that prices remained high as a result of an unlawful conspiracy should be alleged, again with as much detail as possible. Finally, one should plead facts showing that an independent and distinct antitrust injury was suffered in the United States. Merely alleging that an antitrust injury was felt worldwide, including the United States, may not be enough to survive a motion to dismiss.