Two weeks ago, we announced a new biweekly series on the law of the Foreign Trade Antitrust Improvement Act.  Before we embark on our survey of the cases since passage of the FTAIA, let’s spend a few weeks reviewing the slate upon which Congress was writing when they passed the FTAIA – what was the US law of foreign-based transactions when the FTAIA was passed?

American Banana Co. v. United Fruit Company, 213 U.S. 347 (1909).  Probably the earliest major decision on the application of antitrust law to foreign transactions was American Banana Co. v. United Fruit Company, 213 U.S. 347 (1909).  American Banana was an Alabama corporation organized in 1904; United Fruit was a New Jersey corporation which had been organized five years earlier.  According to the complaint, United Fruit had occupied itself between 1899 and 1904 by buying up its competitors, including a non-compete agreement in the purchase contracts.  The companies United Fruit couldn’t buy, it did one of two things – either entered into a contract with the competitor regulating the quantity and price of fruit each competitor could buy, or it acquired a controlling interest in the competitor.  The defendant also supposedly organized a separate wholly owned selling company which by agreement sold all the bananas of all these companies.

In 1903, McConnell started a banana plantation in Panama – at the time, still part of Columbia – and began building a roadway to get the product to the market.  Defendant allegedly advised the plaintiff to either join his group or prepare to hold a going-out-of-business sale.  Two months later, the governor of Panama recommended to the Columbian government that Costa Rica be allowed to administer the part of Panama where McConnell was – even though an arbitration panel had decided it was part of Panama, and therefore part of Columbia.  Over the few months that followed (we’re still in 1903), both the defendant and the Costa Rican government supposedly did what they could to slow McConnell down.  In November 1903, Panama revolted against Columbian rule.  Eight months later, the plaintiff – American Banana Company – bought McConnell out.

And after that, things got even more tangled.  In July 1904, Costa Rican soldiers allegedly seized part of the plantation and a cargo of supplies and stopped the operation of the plantation and construction of the railway.  One month later, enter Astua, who got an ex parte judgment from a Costa Rican court saying the plantation was his.  The defendant then bought the plantation, lock, stock and barrel from the mysterious Astua.  The plaintiff asked the Costa Rican government to please go away and asked the United States to come help – no luck.

So as the lawsuit opens, the plaintiff has no plantation, no railway, and no supplies.  The defendant has shut the plaintiff down and either bought or hog-tied all his competitors in various anticompetitive contracts.  And for good measure, the defendant supposedly offered positions to the plaintiff’s employees and fired its own employees who owned stock in the plaintiff.

The plaintiff filed suit under the Sherman Act.  The Circuit Court for the Southern District of New York tossed the complaint and the Second Circuit affirmed.  The Supreme Court heard argument on April 12, 1909 and handed down its opinion only two weeks later, in an opinion by Justice Oliver Wendell Holmes.

The Court affirmed, noting that “the general and almost universal rule is that the character of an act as lawful or unlawful must be determined wholly by the law of the country where the act is done . . . For another jurisdiction, if it should happen to lay hold of the actor, to treat him according to its own notions rather than those of the place where he did the acts, not only would be unjust, but would be an interference with the authority of another sovereign, contrary to the comity of nations, which the other state concerned justly might resent.”  When the Congress enacted the Sherman Act, Justice Holmes wrote, it was regulating all persons within American jurisdiction, not anybody the police or courts could subsequently catch.  So the Sherman Act didn’t apply to the defendant’s conduct . . . and since they weren’t torts according to Panama or Costa Rica, none of it was tortious at all.  “A conspiracy in this country,” the opinion concludes, “to do acts in another jurisdiction does not draw to itself those acts and make them unlawful, if they are permitted by the local law.”

United States v. American Tobacco Co., 221 U.S. 106 (1911).  Before January 1890, the cigarette industry in the United States consisted of five oligopolists who together controlled 95% of cigarette sales in the United States and 8% of the foreign market.  After a number of years of fierce competition, the companies met and agreed to form the American Tobacco Company.  All the assets of the five companies were conveyed to the new entity.  The new consolidated company accounted for 96-97% of the total domestic market in its first year of operation.

Just over a year after its formation, the American Tobacco Company increased its capital stock from $25 million to $35 million.  In the months that followed, the American Tobacco Company entered into monthly transactions buying up competitors: a successful manufacturer of plug tobacco, one of cheroots and cigars, one of snuff, one of smoking tobacco.  Between 1892 and 1897, the company acquired fifteen additional tobacco companies doing business throughout the southeast.  In every case, the former owners of the target company entered into a non-compete agreement with ATC.  As early as 1893, the president of the ATC allegedly approached several leading manufacturers of plug tobacco and told them they had a choice: either combine with ATC, or ATC would lower its price on the product below its cost.  By 1898, ATC had acquired many of the major players in the plug tobacco sector, assigning the assets and intellectual property of the targets to a new subsidiary, the Continental Tobacco Company.  In the years that followed, American and Continental bought another thirty competitors.  In nearly every case, the target’s manufacturing plants were immediately closed down.  In September 1901, ATC bought a major producer of tobacco products in England, and a trade war ensued, ultimately resulting in the British manufacturers combining to create the Imperial Tobacco Company.  About a year later, American and Imperial entered into contracts in England dividing up the worldwide tobacco market.

In 1908, the Justice Department filed suit against the American Tobacco Company, arguing that the companies’ business practices over the previous eighteen years violated sections 1 and 2 of the Sherman Act.  A total of sixty-five companies and twenty-nine individuals as defendants.  The trial court sided with the government and ordered the defendant to dissolve.

The Supreme Court decided American Tobacco on the same day Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911) came down. The court pointed out the problem with the plain language of the Sherman Act which we noted two weeks ago in the first post in this series: read overly literally, the Sherman Act appears to ban all contracts relating to commerce.  In response to the problem, the Supreme Court adopted a rule first applied by then-Judge William Howard Taft in Addyston Pipe & Steel Co. v. United States: the Sherman Act actually bars contracts which, either by evidence of the defendants’ purpose and its consequences or by the inherent nature of the acts in question, unreasonably restrain trade – usually by increasing prices or reducing output or quality.  The wrongful purpose of the defendants’ conduct in American Tobacco was shown, the Court found, by several factors: (1) ATC was originally organized to end a trade war; (2) ATC’s subsequent conduct tended to increase its control over worldwide production by either buying up competitors or driving them out of business, ultimately resulting in division of the worldwide market through two contracts executed in England; (3) the constantly evolving structure of the various transactions, which the Court suggested was evidence of an unlawful purpose; (4) the acquisition of control over the elements necessary to production of tobacco products, keeping those companies nominally independent while erecting major barriers to entry; (5) consistently shutting down the manufacturing plans of target companies after acquiring them; and (6) the lengthy non-compete agreements which were included in acquisition contracts.

The Supreme Court held that the entire arrangement – not just a subset of transactions, but the original formation of the American Tobacco Company and pretty much everything that followed – violated Sections 1 and 2.  The court stayed that determination for six months, remanding back to the Southern District for an evidentiary hearing to decide what should be done to fully effectuate the underlying purposes of the Sherman Act.  If the matter couldn’t be resolved within the stay, the entities’ assets should be turned over to a receiver to disentangle.  In the meantime, everyone involved was enjoined from any act whose purpose or effect was anticompetitive.

So why are we discussing American Tobacco in a post about the FTAIA?  Well, nobody disputed in American Tobacco that the two worldwide market division agreements had been signed in England.  Yet, no one involved appears to have questioned the federal courts’ power to order the whole arrangement unraveled.  So already there are indications that it might not take long for the Court to edge away from the view that its antitrust jurisdiction depended entirely on where conduct took place.

And a bit of American Tobacco trivia: the oral argument in January 1910 took four days.  Three months later, the Court decided it hadn’t heard enough and ordered another argument.  And in January 2011, the reargument took four more days.  Different times indeed.

United States v. Hamburg-Amerikanische Packet-Fahrtachtien-Gesellschaft, 200 F. 806 (S.D.N.Y. 1911).  Our next case comes from the Circuit Court for the Southern District of New York, which had also handled American Banana and American Tobacco.  Various steamship companies agreed to form the Atlantic Conference.  The agreement divided up the market for carrying steerage passengers across the Atlantic, assigning each company a stated percentage and providing for the pooling of receipts.  Prices weren’t directly fixed, but if anyone reaching 75% or more of traffic had the right to direct anyone to raise or lower their prices.  Following the formation of the Atlantic Conference, the participants allegedly forced many of their competitors out of business.

The defendants argued that the Sherman Act had to be construed as limiting only acts entirely performed in the United States and/or by American actors.  The court wasn’t having it: “it is immaterial where [the contract] was entered into or by what vessels it was to be, or has been, performed.  Citizens of foreign countries are not free to restrain or monopolize the foreign commerce of this country by entering into combinations abroad nor by employing foreign vessels to effect their purpose.  Such combinations are to be tested by the same standards as similar combinations entered into here by citizens of this country.”

United States v. Pacific & Arctic Railway & Navigation Company, 226 U.S. 87 (1913).  This case involved a series of agreements between various steamship, railroad and wharf companies relating to trade in freight and passengers from American and Canadian ports in the Pacific northwest to American and British ports in the Yukon.  According to the complaint, the defendants refused to enter into joint or through rates with independent steamship lines, refused to bill freight or passengers from the United States to Yukon river points except by ships belonging to one of the defendants, fixed railroad local rates between Skagway and the Yukon River points and fixed wharfage rates for freight carried by one of the defendants.

The defendants argued that some of the route alleged to be monopolized was outside United States territory, so the Sherman Act didn’t apply at all.  The Supreme Court dismissed this notion, commenting that if antitrust jurisdiction was limited to conduct occurring entirely in a single country, then neither the U.S. or Canada could reach the defendants.  The indictment alleged a purpose to interfere with United States commerce, and that was illegal – whether the defendants were U.S. companies or citizens or foreign ones.

One last note about Pacific & Arctic.  If one is planning to enter into an agreement to monopolize rail trade in a certain market, it’s probably best not to call the four still nominally independent railroads – collectively – “the railroad.”  226 U.S. 87, 90.

Thomsen v. Cayser, 243 U.S. 66 (1917).  Calling themselves “The South African Steam Lines,” the defendants in Thomsen allegedly indulged in price discrimination and commissions in freight charges to coerce other shippers and merchants to use their services.  The defendants also agreed that they would not dispatch steamers to African ports at stated and regular dates, but rather would send out shipments “as they deemed best for their private gain and profit.”  Beginning in the spring of 1902, two steamship companies began competing with the combination, offering a rate lower than the defendants’ rate.  The defendants responded by announcing lower prices – but only on lines competing with the rebel lines’ ships, and only where the shipper disclosed the name of his consignee.  Refunds of part of the charge were allegedly passed out only to shippers which shipped exclusively by the shippers included in the “South African Steam Lines” combination.  Subsequently, the defendants allegedly threatened to withhold rebate payments from shippers who declined to promise to remain “loyal.”  The trial court in Thomsen dismissed the complaint, but the circuit court of appeals reversed.  The retrial resulted in a jury trial and a verdict for the plaintiffs.

Before the Supreme Court, the defendants argued that the conspiracy took place in a foreign country, and was therefore beyond the jurisdiction of the Sherman Act.  The Supreme Court summarily rejected the notion, citing Pacific & Arctic Railway for the proposition that a combination to affect the foreign commerce of the United States and partially put into action here was within the jurisdiction of the federal courts.

United States v. Sisal Sales Corp., 274 U.S. 268 (1927) – The drift away from the hardline view of American Banana continued in United States v. Sisal Sales Corp.  The bank defendants had lost quite a bit of money only years before when the sisal market collapsed.  By the time the markets in the Yucatan reopened, the banks found themselves holding 400,000 bales of fiber as a result of foreclosures.  The banks allegedly undertook the scheme in order to increase the value of their holdings, thereby recouping their losses plus whatever profits they could manage.  The banks allegedly began the scheme in early 1919 by organizing the Erie Corporation and transferring not only its sisal, but another 250,000 bales acquired in the Yucatan to Erie.  Erie managed to get laws favorable to it enacted by the Yucatacan and Mexican governments.  As a result, most of the competitors in the market were forced out of business.  The defendants then organized the Sisal Sales Company, transferred Erie’s sisal stocks to it, and by the use of more discriminatory legislation wound up as the preeminent force in the market.

The defendants argued that the court had no jurisdiction under the rule of American Banana.  The Supreme Court dispatched that argument in a single paragraph: the allegations stated a claim for violation of American law by parties subject to federal jurisdiction within American territory, not of something done by a foreign government at the instigation of private parties.  The fact that the scheme was substantially based on discriminatory legislation by foreign actors didn’t make any difference – the defendants had taken action both within the United States and elsewhere in order to affect U.S. commerce, and that meant game over.

United States v. National Lead Co., 63 F. Supp. 513 (S.D.N.Y. 1945).  This case involved a 1920 agreement between two producers of titanium pigments, the Titanium Pigment Company and Titan Company, to divide the lucrative worldwide market for titanium pigments.  According to the agreement, Titan was granted a license exclusive of all others from Titanium Pigment Company to manufacture and sell its products anywhere in the world outside of North America, Central America and Panama.  Titanium Pigment Company was granted an exclusive license to manufacture and sell Titan’s products in North America, Central America and Panama.  (Curiously, the defendants proposed to continue competing with each other in South America.)  At the same time, National Lead (which owned Titan Pigment Company), agreed to respect the contract and assign all its patents and improvements in titanium pigments to Titanium Pigment Company.  Judging from the opinion, the parties were quite open about what they were up to: the “explicitly stated objects were: 1) the elimination of competition and 2) the advancement of the art through the exchange of technology” – but of course, the second object would only really kick in once the competition was eliminated.

In 1927, National Lead acquired an 87% interest in Titan.  Two years later, National Lead organized a new subsidiary called Tinc, which acquired all of Titan’s rights and liabilities under the 1920 contract.  By 1936, National Lead had managed to acquire all of Titanium Pigment Company too.  Not long after, National Lead created additional subsidiaries to control distribution in France and central Europe.  Around that same time, Tinc allegedly joined with several other companies to form TK to control the Japanese market.

Once again, the defendants argued before the Supreme Court that jurisdiction under the Sherman Act couldn’t extend to conduct overseas on behalf of foreign corporations, relating to the commerce of foreign nations.  The argument didn’t get very far: “{I]t has been alleged and proved that a conspiracy was entered into, in the United States, to restrain and control the commerce of the world, including the foreign commerce of the United States.”  Since the agreement involved material acts in the United States and was intended to affect U.S. foreign commerce, the court held that the case fell under the rule of Sisal Sales Corp. rather than American Banana.

Join us back here in two weeks as we continue our review of the pre-FTAIA cases involving foreign actors, corporations and contacts.

Image courtesy of Flickr by Luke Jones (no changes).

 

Photo of Kirk Jenkins Kirk Jenkins

Kirk Jenkins brings a wealth of experience to his appellate practice, which focuses on antitrust and constitutional law, as well as products liability, RICO, price fixing, information sharing among competitors and class certification. In addition to handling appeals, he also regularly works with…

Kirk Jenkins brings a wealth of experience to his appellate practice, which focuses on antitrust and constitutional law, as well as products liability, RICO, price fixing, information sharing among competitors and class certification. In addition to handling appeals, he also regularly works with trial teams to ensure that important issues are properly presented and preserved for appellate review.  Mr. Jenkins is a pioneer in the application of data analytics to appellate decision-making and writes two analytics blogs, the California Supreme Court Review and the Illinois Supreme Court Review, as well as regularly writing for various legal publications.