competition and the state - university of...

Competition and the State Edited by Thomas K. Cheng, loannis Lianos, and D. Daniel Sokol

STANFORD LAW BOOKS

An Imprint of Stanford University Press

Stanford, California

Contents

Contributors vii

Introduction 1

PART I: CONCEPTUALIZING AND RE-CONCEPTUALIZING

THE INTERACTION BETWEEN COMPETITION

LAW AND GOVERNMENT ACTIVITIES

1. Privatization and Competition Policy (Alexander Volokh) 15

2. Toward a Bureaucracy-Centered Theory of the Interaction

between Competition Law and State Activities (Ioannis Lianos) 32

3. Competition Issues and Private Infrastructure Investment through

Public-Private Partnerships (R. Richard Geddes) 56

PART II: IS THERE A NEED FOR A SPECIFIC

SUBSTANTIVE LEGAL FRAMEWORK IN DOMESTIC

AND INTERNATIONAL COMPETITION LAW?

4. State-Owned Enterprises versus the State: Lessons from

Trade Law (Wentong Zheng) 75

5. What Drives Merger Control? How Government Sets the

Rules and Play (D. Daniel Sokol) 89

6. Antitrust Enforcement and Regulation: Different Standards

but Incentive Coherent? (Alberto Heimler) 108

7. International Law and Competition Policy (Paul B. Stephan) 121

Chapter 7

International Law and Competition Policy

Paul B. Stephan

States approach the regulation of international commerce with mixed mo

tives. In a static world motivated exclusively by material interests, every state

would like its producers to get monopoly rents from their foreign sales and its

consumers to benefit from full competition. To the extent an industry has the

characteristics of a natural monopoly, due either to positive returns to scale or

declining marginal costs, each state would like to host the producer. But in a

dynamic world where states can respond to the actions of others, it becomes

much more difficult either to predict or prescribe the pattern of international

competition regulation that will or should emerge. 1

The range of possible dynamic responses is great. Only a few narrow inter

national commitments limit what states can do. 2 A pro-competition importing

state can go after foreign producers who collude in restricting sales in its im

port market to raise prices. Alternatively, a state might try to open up foreign

export markets for its producers. In either case, it may impose sanctions on

foreign firms to further its policy. But what happens if the foreign firms act in

coordination with, or under the control of, a foreign state?

As this question indicates, competing competition policies can lead to in

ternational conflict. It is the job of public international law to address such

sources of tension. Several general international law doctrines apply to com

petition law conflicts. None, however, has great clarity or definiteness. There

121

122 Legal Framework in Domestic and International Competition Law

remains plenty of room to link arguments for application of these doctrines to claims about optimal international competition policy.

This chapter explores the concepts of territoriality, sovereign immunity, and act of state as used in international law and applied to competition law conflicts. It focuses on U.S. practice, because the United States has been the principal exporter of competition policy and thus has generated the most international conflicts. It argues that current trends in U.S. law bolster these traditional international law doctrines and thus reduce the likelihood of disagreements over competition policy. Whether these developments will bring us closer to an optimal international competition regime is more debatable.

I. Territoriality and National Competition Law Traditionally, international law stood on two foundations: territoriality and sovereign consent. Both concepts presupposed states as indispensable lawmakers. States function as the ultimate source of authority over particular territory. Endowed with state authority, sovereigns may consent to obligations through agreements with other states. Two hundred years ago, Chief Justice Marshall provided the canonical statement of the doctrine:

The jurisdiction of the nation within its own territory is necessarily exclusive and absolute. It is susceptible of no limitation not imposed by itself. Any restriction upon it, deriving validity from an external source, would imply a diminution of its sovereignty to the extent of the restriction, and an investment of that sovereignty to the same extent in that power which could impose such restriction.

All exceptions, therefore, to the full and complete power of a nation within its own territories, must be traced up to the consent of the nation itself. They can flow from no other legitimate source.3

Accordingly, the traditional conception of international law allocated authority to sovereigns on the basis of territory and then facilitated reallocations of authority that flow from agreements among sovereigns. These agreements could be express, as with treaties, or implied, as with customary international law. The concept of" exclusive and absolute" sovereign authority over its territory itself rested on customary law, although Article 2(1) of the UN Charter ratifies the concept.4

Over the last 30 years, advocates and scholars have challenged both of these foundations. Territoriality, they argue, has become obsolete in an increasingly

International Law and Competition Policy 123

interconnected world. 5 State consent similarly has become less important as

coalitions of interested persons take shape across state borders to formulate and

implement international norms. 6 These jurists envision a new international law

that focuses on human interests without mediation by states or the territory

that they occupy or control. 7

This vision, however, outstrips reality. States remain indispensable to the

formation of international law, and the mapping of state authority onto state

territory remains central to the international legal system. Recent evidence of

the enduring importance of territoriality can be found in the International

Court of Justice's decision in Jurisdictional Immunities ~f the State.8 The Court

considered a claim that the traditional immunity enjoyed by one sovereign in

another's courts must give way when a state is responsible for war crimes. The

prohibition of fundamental norms of international law, the argument went,

rests on a higher authority than state consent and thus requires the suspension

of the normal privileges that one sovereign accords another.

The Court categorically rejected this argument. It instead ruled that excep

tions to immunity always must rest on consent, either express or implied by

custom. No such exception exists for even grave breaches of that part of inter

national law that protects individual, rather than state, interests. 9

Of course, just because the International Court of Justice believes this to

be true, it does not make it a fact. International law lacks an authoritative

arbiter. But it remains clear that the significance of states and their borders

still matters in the international system, changes in the structure of interna

tional communication, transportation, and the structure of the world economy

notwithstanding.

What does all this mean for competition policy? A wooden application of

the principles of territoriality and sovereign consent would seem to lead to an

absolute prohibition of any regulation by a state of conduct taking place on

another sovereign's territory, absent some agreement to the contrary. Indeed,

the United States once embraced this position.10 The Supreme Court, however,

rethought the issue long ago. By the 1920s it approved sanctions imposed on

an international price-fixing scheme involving foreign participants because a

key meeting of the participants took place in the United States.11 At the end

ofWorld War II, the government argued that international law had evolved to

the point where a state could regulate extraterritorial anticompetitive conduct

that had a substantial, direct, and intentional effect on the U.S. market.12 Many

other states took serious exception to this position, but the Supreme Court en

dorsed it in a somewhat careless manner in 1993.13 At about the same time, the


European Court of Justice did effectively the same thing, holding that the Eu

ropean Economic Community then (now the European Union) could regulate

a price-fixing conspiracy among foreign producers that used local agents in its

implementation. 14

All of these cases involved foreign producers who sought to collect mo

nopoly rents from domestic consumers. When the victims of anticompetitive

behavior are foreign consumers, different standards have applied. In Matsushita

Electric Industrial Co. v. Zenith Radio Corp., the Court gave the back of its hand

to the argument that the Sherman Act provided a remedy to a plaintiff who

sought compensation for its exclusion from the Japanese domestic market. U.S.

antitrust laws, the Court declared," do not regulate the competitive conditions

of other nations' economies."15 More recently, the Court in F. Hoffman-La Roche

v. Empagran S.A. ruled that the Sherman Act does not apply to anticompetitive

conduct that causes only foreign injury. 16 Exceptionally, the Hoffman-La Roche

opinion makes much of the customary international law of territoriality, which

it invoked to justify its interpretation of the relevant statute. This interpretive

tool, the Court argued, "helps the potentially conflicting laws of different na

tions work together in harmony-a harmony particularly needed in today's

highly interdependent commercial world."17

The last, cryptic signal from the Court on the question of antitrust extra

territoriality is lodged in a footnote in Morrison v. National Australia Bank Ltd.,

a recent pronouncements on the presumption against extraterritoriality in

U.S. economic regulation. 18 The case is significant both because it involved

securities regulation, an area of great importance to international business, and

because it repudiated nearly half a century of lower court practice. In distin

guishing its earlier antitrust decisions, the Court noted simply that the Sher

man Act applied extraterritorially, without explaining why. 19

Taken together, these cases convey a sense of unease, if not confusion. In

other regulatory fields, the Court has seized on territoriality as a means of pro

viding a bright line for managing transnational problems. Congress, the Court

seems to believe, may manage international regulatory conflicts as it chooses,

but it must take the initiative in doing so. Absent explicit legislative action, the

default will be a lack of U.S. supervision of foreign transactions, whatever their

effect on U.S. interests.20 But in the field of antitrust, a different baseline applies.

Its dimensions and the reasons for the difference remain murky. Doubtlessly the

Justices do not agree among themselves as to these matters.

Looking back at the emerging doctrine, one can detect two competing

impulses framed by a structural problem. The structural problem is the cryptic


language of the Sherman Act, which forbids collusive actions "in restraint of

trade or commerce" but provides no clear guidance as to what this means.

faced with this challenge, the U.S. courts have taken it upon themselves to de

velop a common law of fair trade that changes with time and fashion. 21 Unlike

(perhaps) other regulatory fields, Congress already has taken the initiative in

delegating to the courts the responsibility for devising the substantive standards

in antitrust.

In developing this common law, the Court has tried to accommodate two

competing insights. On the one hand, in a world of international commerce,

foreign conspiracies can impose significant harm on U.S. consumers and pre

sumptively should face regulation. On the other hand, judicial assaults on the

choices that foreign states make about the organization of their own markets

seem quixotic as well as dangerous. The Court plausibly could insist on further

direction from Congress before taking on other countries.

A focus not on the location of conduct but rather on the place of harm, to

some extent, balances these impulses. If foreign states choose to submit people

on their territory to monopoly rents, the case for U.S. courts coming to the

rescue of these victims seems especially weak. Thus, territoriality comes back

in as a constraint on national regulation, only more loosely than other areas.

The "place of harm" standard is necessarily more indefinite, and therefore more

debatable, than the "place of sale" rule imposed in Morrison.

To be clear, the cases do not explicitly invoke a territorial "place of harm"

limit on the Sherman Act. Rather, the courts' behavior and the somewhat con

fused accounts they give of their conduct seems to fit with such a rule. Thus,

one can used territoriality to predict judicial behavior, even if the courts them

selves talk about the concept obliquely when they do so at all.22

But this modified use of territoriality does not help with one important

problem. In many instances, the foreign producers seeking monopoly rents in

the United States are arms of a foreign state or otherwise act under state con

trol. Here the economic injury to U.S. consumers results from a direct inter

national conflict based upon opposing state policies. For a court to do nothing

would leave the supposed beneficiaries of the Sherman Act without a cause of

action. But to allow litigation would put the courts in the position of attacking

foreign governments without the clear backing of Congress. If territoriality

were the only limit on the Sherman Act, then these suits should proceed. Yet,

courts understandably have been queasy about taking on other states directly.

Because territoriality offers no help here, the courts have looked to other

doctrines to limit litigation against foreign states and their competition policies.


International law offers two more doctrines of possible relevance-namely, sovereign immunity and the act of state doctrine. Each is relevant, even if only the first reflects a clear obligation imposed by international law.23

II. Sovereign Immunity as a Limit on Regulation Historically international law has blended the concepts of exclusive sovereign control over its territory and of sovereign consent by presupposing that sovereign acts performed on another state's territory rest on the host state's permission and that a promise not to hold the acting state responsible in the host state's courts accompanies this permission. Under traditional doctrines of international law, a state that invades another's territory without consent commits an international wrong, for which retaliation up to and including armed attack was permissible. If the state's presence came with consent, by contrast it would be assumed that the host state's consent embraced a promise not to interfere with the acting state's conduct to any greater degree than the acting state had agreed to at the outset. Out of these implied promises arose a doctrine of sovereign immunity, which instructed domestic courts not to exert their authority against a foreign sovereign without the consent of that sovereign or a command of its own state. 24

During the twentieth century, this doctrine evolved. After World War II, the United States took the lead in arguing for an exception to a general rule of immunity in cases where a sovereign mimicked a private actor (acta Jure gestionis), such as by engaging in commercial activity. Congress in 197 6 replaced, as to sovereigns but not government officials, the common law of immunity with the Foreign Sovereign Immunities Act (FSIA).25 This statute constitutes U.S. law, but it does not reflect international practice in all respects, and in a few instances, it may even violate international law.26

Under the FSIA, a foreign sovereign, or a legal entity controlled by a foreign sovereign, enjoys immunity from suit only if it satisfies several requirements. First, in the case of a sovereign-owned legal entity, the firm must not be formed under U.S. law. 27 Second, it must be directly owned by a foreign state at the time of the suit. 28 Third, the sovereign or entity must not have consented to the suit. 29 Fourth, the suit must not be based on commercial activity that is either carried on in the United States or has a direct effect in the United States. 30

The recent OPEC litigation illustrates how these rules apply to a foreign price-fixing cartel aimed at the U.S. market.31 U.S. subsidiaries of foreign na-


tional oil companies (NOCs) enjoy no immunity because they are formed

under U.S. law. The NOCs also are subject to suit to the extent that they

are responsible for the sale of products in the United States, because this ac

tivity fits within the statutory exception for commercial activity. Neither the

states that make up OPEC nor the organization itself was a named defendant,

even though the organization and its state members made up the heart of the

conspiracy.

From a rational plaintiff's perspective,joining OPEC and the member states

to the litigation would have been pointless. Both the U.S. subsidiaries and the

NOCs were likely to have significant attachable assets in the United States.

OPEC has no U.S. presence, and foreign states normally do not own outright

attachable assets in foreign states. 32 To the extent that the plaintiffs wanted to

make money from the litigation, the available exceptions to foreign sovereign

immunity gave them everything they could have wanted.

The U.S. stance on sovereign immunity is not the. only one, of course. Some

states, including China, still take the position once embraced by the United

States that all state acts have a sovereign character and thus enjoy immunity.33

The International Court of Justice expressly refused to decide whether cus

tomary international law still embraces this rule.34 Even if the old position no

longer reflects the international consensus, those states that adhere to it may

implement this all-encompassing immunity within their own legal systems.

The practical consequence of broader sovereign immunity outside the

United States is limits on enforcement of any judicial awards obtained do

mestically. A beneficiary of a U.S. judgment would have no ability to reach

state-owned assets (including the assets of state-owned companies) located in

jurisdictions that embrace the traditional approach. This adds to the already

considerable difficulty of enforcing judgments against foreign sovereigns.

At the end of the day, however, sovereign immunity is not a significant con

straint on the use of competition law to attack state-organized export cartels.

As a general rule, the territoriality principle allows states to impose their own

rules on assets invested in, as well as transactions taking place on, that state's

territory. This means that retaliation against foreign cartels works only to the

extent that the foreign actor has put its people or property at risk in the retali

ating state. This fundamental characteristic of the international system is as true

for private cartels as those organized by states. 35 But where foreign actors do

enter the U.S. market, sovereign immunity does nothing to prevent the full

throated application of U.S. competition rules.


Ill. The Puzzling Persistence of the Act of State Doctrine

Sovereign immunity is not, however, the end of the story. Other doctrines,

emanating from, if not strictly required by, international law also allow courts

to manage conflicts between cartel-promoting and consumer-protecting states.

In the United States, three overlapping doctrines provide some latitude to

courts seeking to avoid confrontations with foreign governments: the act of

state doctrine, the foreign sovereign compulsion defense, and the political ques

tion doctrine.

The act of state doctrine is, in the United States, one of the more com

plex and confused bodies of judicially constructed law. It is not a product of

international law as such but rather an independent response by some states to

problems raised by the territoriality principle. The leading U.S. decision Banco

Nacional de Cuba v. Sabbatino took great pains to state that neither interna

tional law nor the Constitution compels the doctrine. 36 Rather, courts apply

the doctrine to avoid judicial interference in decisions best made by the politi

cal branches. But unlike the political question doctrine, the matters covered by

the doctrine are not inherently incapable of judicial resolution. Thus, the courts

accept that Congress can override the doctrine and require them to address

particular disputes involving foreign sovereign acts.37

Where the act of state doctrine applies, it requires a court to accept the va

lidity of an act of foreign state. Acts by a sovereign of a sovereign nature within

its own territory trigger the doctrine. What suffices to override the doctrine,

as well as a precise demarcation of its boundaries, remains controversial. But

the Supreme Court has passed up at least one opportunity to denounce the

doctrine altogether, and the lower courts continue to apply it in a variety of

contexts, including antitrust cases.38

At first blush, the role of the doctrine in antitrust is puzzling. It is, after all,

only a default rule that courts may apply in the absence of any clear instruction

from the legislature. Act of state issues typically arise in disputes over property

rights, including mining and drilling concessions. Lacking constitutional stature,

the doctrine cannot survive a contradictory statutory command. The Sherman

Act is just such a command, instructing the courts to address anticompeti

tive behavior affecting U.S. commerce. One might think that the mandate of

Congress would supplant whatever discretionary considerations that motivate

the doctrine. And the antitrust laws make no distinction between private and

foreign-sovereign acts.

An explanation for the persistence of act of state in this field can be found

in a feature noted above: The U.S. courts have understood the antitrust laws as


effecting a delegation of common-law powers to the judiciary. 39 The legislative

instruction in essence is no instruction, leaving the judiciary vested with the

responsibility to grapple with anticompetitive conduct but otherwise without

legislative guidance. Congress has neither overridden common-law doctrines,

of which act of state is an example, nor expressly endorsed departures from in

ternational practice, the territoriality principle in particular. The nature of the

statutory delegation thus invites reference to a doctrine that, while not apply

ing of its own force, remains useful as an interpretive template.40

By way of comparison, the Supreme Court has found the act of state doc

trine and its converse, the revenue rule, irrelevant in two cases involving the

scope of criminal fraud. In WS. Kirkpatrick & Co. v. Environmental Tectonics Corp.,

International, the Court allowed a firm to bring a civil suit against a competitor

under the Racketeering Influenced and Corrupt Organizations Act (RICO)

for obtaining a government contract through bribery.41 The Court deemed the

relevant question to be whether the payment of a bribe to obtain a govern

mental favor constituted fraud under federal law, not whether the bribe invali

dated the contract under Nigerian law.42 Accordingly, the act of state doctrine

did not apply.

The revenue rule is the logical counterpart of the act of state doctrine.

Just as the doctrine requires a court to accept the validity of a sovereign act

undertaken with the sovereign's territory, the rule requires a court to give no

extraterritorial effect to a sovereign's revenue impost.43 In Pasquantino v. United

States, the Court rejected the argument that this common-law rule should illu

minate the interpretation of"property" for purposes of wire fraud liability. 44 It

accordingly held that an attempt to evade Canadian customs duties constituted

criminal fraud because Canada's right to duties is a property interest within the

meaning of the statute. The Court asserted that the United States had a legiti

mate interest in criminalizing fraud carried out on its own territory, even if the

prosecution had the collateral effect of strengthening the sanctions for evasion

of a foreign revenue law.

Although the concepts of fraud and property both have their roots in the

common law, the Court has not understood the criminalization of fraud un

der federal law as constituting a delegation of general lawmaking power to

the judiciary. As a result, common-law doctrines derived from the principle

of territoriality do not have the same role to play in illuminating the scope

and meaning of the statutes. The Court instead focuses on the purpose of the

statute and the reprehensibility of the conduct involved, not on the effect of

criminalization on foreign sovereign acts.Antitrust is different precisely because


the fact of the delegation of judicial lawmaking power is so clear, while the extent of this power is so undefined.

Even though antitrust in the United States rests on legislation, the courts legitimately may use the act of state doctrine as an interpretive tool. This basic point, however, does not resolve how the doctrine may function in specific cases. In particular, it leaves open the question of what limitations may constrain it. The Supreme Court has identified three possible exceptions, although it has embraced only two. 45 First, an act of positive law can override the doctrine, including rules of international law based on a high degree of codification or consensus.46 Second, the Court in Alfred Dunhill of London, Inc. v. Republic of Cuba held that state entities acting entirely within their civil law competence may do things that do not rise to the level of sovereign acts, and thus fall outside the doctrine. 47 Third, a plurality of the Dunhill Court endorsed a commercial exception to the doctrine. 48 In addition, the Court in WS. Kirkpatrick & Co. indicated more generally that the doctrine did not apply when the object of a lawsuit is not to treat a foreign act as a legal nullity but rather to attach adverse consequences to it.49

Unless and until international law embraces a norm condemning export cartels, either by treaty or by broad consensus constituting a binding customary norm, the first exception cannot apply. The only body of international law that comes close to creating such a norm is the Uruguay Round Agreements, which regulate trade law and arguably address anticompetitive refusals to export. But both U.S. and EU law expressly bar domestic courts from applying these agreements, instead relegating enforcement exclusively to state-to-state dispute resolution. so

The Dunhill exceptions, however, have considerably greater purchase. In antitrust cases, courts without exception have rejected the argument that all acts of state-owned entities constitute sovereign acts for purposes of the act of state doctrine. Were the rule otherwise, all activities carried out within the foreign state's territory would enjoy immunity from judicial review, contrary to the clear implication ofFSIA's commercial activity exception. The challenge instead is distinguishing sovereign acts from other behavior. 51

One line of argument focuses on the role of sovereign compulsion. As a formal matter, litigants and courts have treated foreign sovereign compulsion as an analytically distinct issue. 52 As an analytical matter, however, these cases are better seen as applying Dunhill.Actions by foreign firms, whether state-owned or not, that comply with a mandatory rule on the territory of the state that issues the mandate are themselves extensions of the state's sovereign authority.


Attacks on those acts are simply assaults on the exercise of sovereign power. The

compulsion cases thus distinguish the exercise of civil law rights, to which the

doctrine does not apply, from the exercise of sovereign authority.

Another line of cases struggles with Dunhill's commercial exception. In the

most recent OPEC litigation, the Fifth Circuit ruled that a majority of the

Supreme Court had not excluded commercial conduct from the doctrine and

therefore refused to consider the issue.53 The Ninth Circuit reached the same

outcome by treating limits on exports of natural resources as inherently non

commercial. 54 Both decisions have the effect of giving conclusive effect to sov

ereign mandates carried out within the state's territory, even when the mandate

involves commercial transactions and results in direct harm to U.S. consumers.

Finally, there remains the general question of whether the act of state doc

trine has any relevance to suits that seek compensation for the harm caused by

a sovereign act, rather than nullifying the act outright. Read broadly, WS. Kirk

patrick & Co. seems to limit the doctrine only to suits falling into the second

category. If so, few if any antitrust suits ever would raise an act of state issue.

But the WS. Kirkpatrick opinion is deeply enigmatic, indicating at one point

that imposing tort liability for a wrongful detention would constitute the in

validation of the official act of detention. 55 Until the Court revisits the issue,

it may be best to treat that case as resting on a narrower ground-namely, the

inconsistency between the doctrine and the legislative purpose of regulating

the payment of bribes to foreign officials.

As noted above, the Supreme Court has yet to consider whether foreign

sovereign compulsion constitutes a valid excuse for conduct that otherwise

would be actionable under the antitrust laws.56 A number oflower courts have

applied the defense in instances where the compulsion is transparent and ema

nates from government policy makers, as opposed to the managers of state

owned enterprises. The prevalence of the defense may indicate that it will

endure and ultimately gain the endorsement of the Supreme Court.

Simply as a matter of analytic clarity, however, it does not appear that the

foreign sovereign compulsion defense does any useful work. 57 Compulsion re

quires a credible threat, which as a practical matter involves proposed action

or inaction with respect to people or assets on the territory of the threatening

sovereign. Anything that should count as foreign sovereign compulsion, accord

ingly, also would meet the territorial and sovereign-act components of the act

of state doctrine as limited by the Dunhill majority.

In the recent OPEC lawsuit, the Fifth Circuit invoked an alternative ground

for dismissing the complaint, holding that consideration by a court of a claim


that maintenance of the OPEC cartel violated the Sherman Act would violate the political question doctrine. In doing this, the Fifth Circuit embraced the position of the Department of Justice in its amicus brief. On its face, however, the holding seems nonsensical.

The political question doctrine, however murky in detail, rests on a bedrock constitutional principle. Due either to an express constitutional assignment of responsibility or the inherent nature of the judicial process, some issues as a constitutional matter may not be resolved by the courts.58 The doctrine thus delineates an area where courts lack the capacity to adjudicate. But what does an attack on a government-organized cartel have to do with judicial incapacity? Is it plausible that, were Congress to adopt a law that expressly extends the Sherman Act to cartels managed by foreign states, the judiciary would refuse on constitutional grounds to carry out this mandate? If the answer is no, then surely the judiciary has the constitutional capacity to do the same under the currently vague standards of that statute. 59 Accordingly, talk about the doctrine seems more of a distraction than useful in international antitrust litigation, notwithstanding the arguments of the government and the occasional inclination of the lower courts to embrace them.

* * * In a world where optimal global consumer welfare dominated all other policy objectives, competition authorities probably would not distinguish between private and governmental conspiracies in restraint of trade. But in a world where states pursue other objectives and embrace strategic trade objectives, unilateral pursuit of aggressive proconsumer competition objectives invites trade wars rather than cooperation. In some instances, the risk is worth it, because a risk of sanctions may produce market liberalization. In such conflicts, the court may become useful instruments. But rarely do states regard their judiciary as the best place to locate the decision as to when to go to war.

One can imagine a world where the U.S. judiciary, out of an abundance of caution, fully embraced the territoriality principle and insisted that Congress mandate expressly any imposition of antitrust liability on conduct taking place outside the United States. Instead the courts have taken the riskier course of presumptively allowing lawsuits wherever the harm, rather than the conduct, occurs in the United States. But to ameliorate that risk, the courts, not always with a clear doctrinal basis, have withheld action when anticompetitive acts result directly from a transparent command of a foreign state. In such instances,


the willingness of the foreign state to take responsibility for the anticompeti

tive conduct relocates the dispute to the sphere of state-to-state negotiations.

Where negotiations break down, the legislature still may enlist the courts in

the battle, but the courts will not start hostilities on their own. This outcome

is conservative in the sense that judicial inaction removes pressure that could

goad the government to negotiate international agreements that more closely

embrace global consumer welfare. But such conservatism is not necessarily a

bad thing.

Notes to Chapter 7 257

13. Daron Acemoglu & Ufuk Akcigit, State-Dependent Intellectual Property Rights Policy Nat'!

Bureau of Econ. Res., Working Paper No. 12775, Dec. 2006).

14. Michele Boldrin & David Levine, Growth and Intellectual Property (NBER Working Paper

Series No. 12769, 2006). 15. First, supra note 8, at 367. 16. Brunswick Corp. v. Pueblo Bowl-0-Mat, Inc., 429 U.S. 477, 488 (1977) (quoting Brown Shoe

Co. v. United States, 370 U.S. 294, 320 (1962)). 17. Lemley, supra note 12. 18. Robert Z. Lawrence, Brookings Trade Forum (1998).

19. Robert D. Willig, Economic Effects of Antidumping Policy, in Brookings Trade Forum (Robert Z.

Lawrence ed., 1998). 20. Such a thorough analysis should be required for so-called actionable subsidies that, according to

the WTO rules, can be prohibited when the complaining country shows that the subsidy has an adverse

effect on its interests. Actionable subsidies can be prohibited when they seriously injure the importing

country's domestic industry, rival exporters in a third country trying to compete with a subsidized ex

porter, or exporters trying to compete with subsidized domestic firms.

21. Michael Hahn & Kirtikumar Mehta, It's a Bird, It's a Plane: Some Remarks on the Airbus Appel

late Body Report (EC and Certain Member States-Large Civi!Aircraft,WT/DS316/AB/R), 12World

Trade Rev. 139 (2013). 22. In the interpretation of the rules, economic analysis should play a much more prominent role

than in the EU. 23. Carsten Fink & Keith E. Maskus, Intellectual Property and Development: Lessons from Recent

Economic Research (2004). 24. Verizon Communications Inc. v. Law Offices ofCurtisVTrinko 124 S. Ct. 872 (2004), rev'.g 305,

F.3d 89 (2d Cir. 2002). 25. In the Court of First Instance (CFI),judgrnent on the validity of the Commission decision that

found that Deutsche Telekom had abused its dominant position by making it impossible for competitors

to enter in the competitive segment of the market, the CF! claimed that there is an abuse "if the differ

ence between the retail prices charged by a dominant undertaking and the wholesale prices it charges

its competitors for comparable services is negative, or insufficient to cover the product-specific costs to

the dominant operator of providing its own retail services on the downstream market." The fact that

Deutsche Telekom was subject to a price cap regulation would have made a difference only insofar as

the regulation would have imposed on Deutsche Telekom the contested behavior. Alberto Heirnler, Is

Margin Squeeze an Antitrust or a Regulatory Violation?, 6]. Competition L. & Econ. 879 (2011).

26. Damien Geradin & Miguel Rato, FRAND Commitments and EC Competition Law, (2010),

available at http://ssrn.com/abstract=1527407.

27. SeeCaseT-167108. 28. European Commission Case No. COMP/37.792 Microsoft of24.3.2004. See Robert D.An

derson & Alberto Heimler, What Has Competition Done for Europe? An Inter-Disciplinary Answer, 4 Aus

senwirtschaft (2007). 29. Another aspect of the case that involves the bundling of Microsoft's Media Player software with

its operating system is not discussed in the paper.

30. See First, supra note 8. 31. Christos Genakos et al., The European Commission vs. Microsoft: Competition Policy in

High-Tech Industries (2007) (LSE working paper).

32. See also on this Ravi Mehta, Imprecise Legal Concepts Are No Excuse, Competition Law View

from Blackstone Chambers, available at http:/ I competitionbulletin.com/.

33. See the Justice Department press release, available at http://www.justice.gov/atr/public/press

_releases/2011 /266149 .htm. 34. See Chapter 2.

Chapter 7 1. See generally Paul B. Stephan, Global Governance, Antitrust, and the Limits of International Cooperation,

38 Cornell Int'! L.J. 173 (2005); Edward Iacobucci, The Interdependence ofTrade and Competition Policies,

21 World Competition L. & Econ. Rev. 5 (1997).

258 Notes to Chapter 7

2. In theory the Uruguay Round Agreements allow one state to challenge another's competition policy as inconsistent with the General Agreement on Tariffs and Trade or the Agreement on Technical Barriers to Trade. A few cases have arisen, including one under the General Agreement on Trade in Services (which applies only when a government agrees to open up a particular industry to discipline under that Agreement) and a rather idiosyncratic attack on a little used U.S. antidumping statute. For proposals to bring export cartels under WTO regulation, see Marek Martyniszyn, Export Cartels: Is It Legal to Target Your Neighbor? Analysis in Light ef Recent Case Law, 15 J. Int'] Econ. L. 181 (2012); Florian Becker, The Case ef Export Cartel Exemptions: Between Competition and Protectionism, 3 J. Competition L. & Econ. 97 (2007); D. Daniel Sokol, What Do We Really Know About Export Cartels and What Is the Appropriate Solution?, 4 J. Competition L. & Econ. 967 (2008);AndrewT. Guzman, International Antitrust and the WTO--The Lessons from Intellectual Property, 43 Va.J. Int'! L. 933 (2003); Eleanor M. Fox, International Antitrust and the Doha Round, 43 Va. J. Int'! L. 911 (2003); H. C. Claus-Dieter Ehlermann & Lothar Ehring, WTO Dispute and Competition.Law: Views from the Perspective of the Appellate Body's Experience, 26 Ford. Int'! LJ. 1505 (2002); Ernst-Ulrich Petersmann, International Competition Rules for Governments and for Private Business: A "Trade LawApproach"for Linking Trade and Competition Rules in the WTO, 72 Chi.-Kent L. Rev. 545 (1996).After originally embracing increased linkage between trade and competition law in the Doha Round, the WTO members subsequently rejected the idea. See DOHA Work Program-Decision Adopted by the General Council on August 1, 2004,WT/L/579, ~ l(g), available at http:/ /www.wto.org/ english/ tratop_e/ dda_e/ ddadraft_3 ljul04_e. pdf.

3. Schooner Exchange v. M'Faddon, 11 U.S. (7 Cranch) 116, 136 (1812). 4. Jurisdictional Immunities of the State (Germany v. Italy: Greece Intervening), [2012] I.CJ.

143 ~ 57. 5. See, e.g., Marko Milanovic, Extraterritorial Application of Human Rights Treaties-Law, Prin

ciples, and Policy (2011); Kai Raustila, Does the Constitution Follow the Flag? (2009). 6. See Paul B. Stephan, Privatizing International Law, 97Va. L. Rev. 1573 (2011). 7. Louis B. Sohn, The New International Law: Protection of the Rights of Individuals RatherThan States,

32 Am. U. L. Rev. 1 (1982). 8. See supra note 4. 9. The one dissent in the case did advance a theory of international law that marginalized state

consent in favor of ethical values.Jurisdictional Immunities of the State (Germany v. Italy: Greece Intervening), supra note 4 (Canyado Trindade,J., dissenting). The most noteworthy thing about that dissent, however, is that no other member of the Court joined it.

10. American Banana Co. v. United Fruit Co., 213 U.S. 347 (1909). 11. United States v. Sisal Sales Corp., 274 U.S. 268 (1927). 12. United States v.Aluminum Co. of America, 148 F.2d 416 (2d Cir. 1945). Because the Supreme

Court lacked a quorum to consider this case, the court of appeals decision accepting the government's contention remained the final word for nearly half a century.

13. Hartford Fire Insurance Co. v. California, 509 U.S. 764 (1993). The Court expressly disavowed relying on the 1982 Foreign Trade Antitrust Improvements Act, which at least by negative inference might have supported the outcome. 509 U.S. at 796 n.23, 798. Evidence of the hostility of other states includes both clawback regimes that allowed defendants in U.S. courts to sue for restitution of the punitive component of antitrust damages and blocking statutes that forbade cooperation with civil or criminal cases brought in the United States. For a review of this legislation, see Gary B. Born & Peter B. Rutledge, International Civil Litigation in United States Courts 680-83, 972-77 (5th ed. 2011).

14. In re Wood Pulp Cartel: A Ahlstrom Osakeytio v. EC Commission (Joined Cases 89, 104, 116, 117, & 125-129/85), [1988] E.C.R. 5193. See also Gencor Ltd. v. Comm'n (Case T-102/96), [1999] E.C.R. II-753, ~ 90.

15. 475 U.S. 574, 582 (1986). In a footnote, the Court clarified that "the Sherman Act does reach conduct outside our borders, but only when the conduct has an effect on American commerce." Id. at 582 n.6. It then cited Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690 (1962), a case where foreign and domestic producers colluded in a price-fixing cartel directed at the U.S. market. Nowhere in the opinion did the Court refer to the 1982 Foreign Trade Antitrust Improvements Act, which seemed to mandate an exclusion from Sherman Act coverage for foreign economic injuries. In a leading case decided not long after Matsushita, a court of appeals ignored this language altogether when considering a challenge to a state policy of limiting the carriage of bulk imported cargo to national


carriers. O.N.E. Shipping Ltd. v. Flota Mercante Grancolombiana, S.A., 830 F.2d 449 (2d Cir. 1987). It

instead based its decision on the act of state doctrine, discussed below.

16. 542 U.S. 155 (2004).The Court did recognize an exception to this rule in cases where a price

fixing conspiracy targeted at the U.S. market "gives rise to" a foreign injury. The reach of this exception

depends on what standard one employs for causation. At least so far, the courts have understood the

standard to be demanding. On remand, the lower court ruled that foreign consumers did not have a

claim under the Sherman Act when the price-fixing conspiracy as to the U.S. market merely facilitated

their injury. Empagran S.A. v. F. Hoffmann-La Roche, Ltd., 417 F.2d 1267 (D.C. Cir. 2005), cert. denied,

546 U.S. 1092 (2006). 17. 542 U.S. at 164-65.

18. 561 U.S. 247 (2010). The repudiated cases include !IT, Int'! Inv. Trust v. Cornfeld, 619 F.2d

909 (2d Cir.1980); Bersch v. Drexel Firestone, Inc., 519 F.2d 974 (2d Cir.1975); !IT v.Vencap, Ltd., 519

F.2d 1001 (2d Cir.1975); Leasco Data Processing Equip. Corp. v. Maxwell, 468 F.2d 1326 (2d Cir.1972);

Schoenbaum v. Firstbrook, 405 F.2d 200 (2d Cir.), reheard en bane, 405 F.2d 215 (2d Cir. 1968).

19. Id. at 258 note 11 (citing Continental Ore, supra note 15).The footnote then explains that some

earlier cases involved "conspiracies to restrain trade in the United States," but did not indicate that this

was an essential element of a Sherman Act violation. Id. In particular, the Court made no mention of the

1982 amendments to the antitrust statutes as perhaps providing an independent basis for extraterritorial

application. 20. In addition to Morrison v. National Australia Bank, Ltd., the leading cases are Kiobel v. Royal

Dutch Petroleum Co., 133 S. Ct. 1659 (2013), and Equal Employment Opportunity Comm'n v. Ara

bian American Oil Co (Aramco), 499 U.S. 244 (1991). Congress responded to Aramco by adopting

Section 109 of the Civil Rights Act of 1991, Pub. L. 102-166, 105 Stat. 1071 (1991), which imposes

limited nondiscrimination obligations on U.S. employers operating overseas. It reacted to Morrison

through Section 929P(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L.

No. 111-203, 124 Stat. 1376 (2010), which attempts to restore the SEC'sjurisdiction over some foreign

sales of securities but does not apply to private suits. It has not yet reacted to Kiobel. See Paul B. Stephan,

The Political Economy of Extraterritoriality, 1 Pol. & Gov. 92 (2013).

21. National Society of Professional Engineers v. United States, 435 U.S. 679, 688 (1977); North

ern Securities Co. v. United States, 193 U.S. 197, 361-62 (1904) (Brewer,]., concurring). For examples

of shifts in doctrine in the face of changed perceptions of optimal market structure, see, e.g., Leegin

Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007).

22. The Court also can avoid international conflicts by treating foreign state-managed conduct

as not harmful and thus outside the scope of regulation altogether. In Matsushita, the Court ruled that

U.S. law did not apply to a scheme, allegedly managed by the Japanese government, to capture market

share in the United States through low prices absent credible evidence that the scheme, once successful,

would create a durable barrier to entry. This ruling made unnecessary an inquiry into the availability of

a foreign sovereign compulsion defense, the question on which the Court originally had granted certio

rari. I discuss this defense and its relationship to the act of state doctrine below. European case law is less

clear on this point and might allow government regulation of underpricing even in the absence of clear

evidence of a stable barrier to entry. One complicating factor, however, is that many of the cases impli

cate the separate doctrine under European law disallowing improper government subsidies (state aids).

For a review of the cases, see D. Daniel Sokol, Competition Policy and Comparative Corporate Governance of

State-Owned Enterprises, 2009 BYU L. Rev. 1713, 1788-92.

23. See also Marek Martyniszyn, Avoidance Techniques: State Related Defences in International

Antitrust Cases (UCD Working Papers in Law, Criminology & Socio-Legal Studies Research Paper

No. 46/2011, 2012) (reviewing U.S., British, and EC use of sovereign immunity; act of state doctrine;

political question doctrine; and foreign state compulsion in antitrust cases).

24. Schooner Exchange v. M'Faddon, 11 U.S. (7 Cranch) 116 (1812).

25. 28 U.S.C. §§ 1602-11; Samantar v.Yousuf, 560 U.S. 305 (2010).

26. In particular, the refusal of the United States to recognize state immunity in certain cases in

volving torture seems inconsistent with the International Court of Justice's understanding of the present

state of customary international law.

27. 28 u.s.c. §§ 1603(b)(3).

28. Dole Food Co. v. Patrickson, 538 U.S. 468 (2003).

260 Notes to Chapter 7

29. 1605(a)(l). Consent can be implied by failure to object to jurisdiction at the first opportunity.

30. 28 U.S.C. § 1605(a)(2). I ignore for present purposes other statutory exceptions to state im

munity, which do not seem relevant to antitrust issues. 31. Spectrum Stores, Inc. v. Citgo Petroleum Corp., 632 F.3d 938 (5th Cir. 2011).

32. Earlier litigation established that OPEC cannot be subjected to service of process in the United

States. Prewitt Enterprises, Inc. v. OPEC, 353 F.3d 916 (11th Cir. 2003). Under FSIA, immunity from

attachment is broader than immunity from litigation. 28 U.S.C. §§ 1609-11. 33. See Simon N.M.Young, Immunity in Hong Kong for Kleptocrats and Human Rights Violators, 41

Hong Kong L.J. 421 (2011). 34. See Jurisdictional Immunities of the State (Germany v. Italy: Greece Intervening), supra note 4,

at '1! 59. 35. See Joel I. Klein, The Internationalization of Antitrust: Bilateral and Multilateral Responses.

Presented atThe European University Institute Conference on Competition,June 13, 1997, available at

http:/ /www.justice.gov/atr/public/speeches/1580.htm. 36. 376 U.S. 398, 427-28 (1964). 37. Immediately after the Supreme Court decided Sabbatino, Congress overruled the case as to

expropriations of the property of foreign investors. 22 U.S.C. s 2370(e)(2). The Supreme Court has not

found an opportunity to consider a case where that statute applied, but the lower courts have accepted

the congressional mandate. 38. W. S. Kirkpatrick & Co., Inc. v. Environmental Tectonics Corp., International, 493 U.S. 400

(1990). For lower federal court resort to the doctrine in antitrust cases, see Spectrum Stores, Inc. v. Citgo

Petroleum Corp., 632 F.3d 938 (5th Cir. 2011); O.N.E. Shipping Ltd. v. Flota Mercante Grancolom

biana, S.A., 830 F.2d 449 (2d Cir. 1987); Clayco Petroleum Gorp. v. Occidental Petroleum Corp., 712

F.2d 404 (9th Cir. 1983); !AM v. OPEC, 649 F.2d 1354 (9th Cir. 1980); Hunt v. Mobil Oil Corp., 550

F.2d 68 (2d Cir. 1977). 39. See supra note 21. 40. The U.S. government accepts that the doctrine applies in antitrust cases, "if the facts and cir

cumstances indicate that: (1) the specific conduct complained of is a public act of the sovereign, (2) the

act was taken within the territorial jurisdiction of the sovereign, and (3) the matter is governmental,

rather than commercial." U.S. Department of Justice & Federal Trade Commission, Antitrust Enforce

ment Guidelines for International Operations, Antitrust Enforcement Guidelines for International

Operations, Antitrust Enforcement Guidelines for International Operations § 3.33 (1995) [hereinafter

Antitrust Enforcement Guidelines]. 41. 493 U.S. 400 (1990). 42. RICO does not independently criminalize conduct but rather enhances penalties and pro

vides for civil treble damages suits for specific crimes, if carried out in an organized fashion within the

meaning of the statute. The predicate offenses in W. S. Kirkpatrick were mail and wire fraud under 18

U.S.C. §§ 1341, 1343. Environmental Tectonics Corp. v. W. S. Kirkpatrick & Co., 659 F. Supp. 1381,

1391(D.N.J.1987). 43. The United States recognized the revenue rule in The Antelope, 23 U.S. (10 Wheat.) 66, 123

(1825). 44. 544 U.S. 349 (2005). 45. The existence of a fourth exception, where the Executive Branch seeks to override the doc

trine without relying on a statute or treaty, is not clear. In First National City Bank v. Banco Nacional

de Cuba, 406 U.S. 759 (1972), a three-justice plurality asserted that the Executive Branch had this

discretion. Five members of that Court rejected the claim. In W. S. Kirkpatrick & Co., Inc. v. Environ

mental Tectonics Corp., International, 493 U.S. 400 (1990), the Court suggested that factors such as the

views of the Executive might justify constriction of the doctrine but in no event could justify expansion

of its scope. 46. 376 U.S. at 428. At least one lower court has expanded this point by treating all so-called jus

cogens norms of international law as overriding the doctrine. Sarei v. Rio Tinto PLC, 671 F.3d 736, 757

(9th Cir. 2011), vacated and remanded, 133 S. Ct. 1995 (2013), reversed on other grounds, 722 F.3d 1109

(9th Cir. 2013). For criticism of such a use of the jus cogens concept, see Paul B. Stephan, The Political

Economy ofJus Cogens, 44 Vand.J. Transnat'l L. 1073 (2011). In essence, this supposed exception rests

on confusion about the doctrine's role as an interstitial rule, rather than as an independent source of

legal authority.


47. Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682, 693 (1976).The government

does not seem to recognize Dunhill's distinction between a civil law act and a commercial act. Antitrust

Enforcement Guidelines, supra note 40. 48. Id. at 695-96 (plurality opinion). 49. 493 U.S. at 405-06. 50. Portuguese Republic v. Council (Case C-149/96), [1999] E.C.R. I-8395; Uruguay Round

Agreements Act. At least two lower court cases have intimated that a violation of the Uruguay Round

Agreements might negate a sovereign compulsion defense to an antitrust claim. Resco Products, Inc. v.

Bosai Mineral Group Co., Ltd., 2010-1 Trade Cas. 'IJ 77.061 (WD. Pa. 201 l);Animal Science Products,

Inc. v. China National Metals & Minerals Import & Export Corp., 702 F. Supp. 320 (E.N.J. 2010), rev'd

on other grounds, 654 F.3d 462 (3d Cir. 2011). Neither case explored whether such an approach would

be consistent with the statutory command not to incorporate the Uruguay Round Agreements into

domestic law. 51. See Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 707-08 (1962)

(involvement of government agent in anticompetitive conspiracy does not insulate other participants

from antitrust liability); Williams v. Curtiss-Wright Corporation, 694 F.2d 300, 304 (3d Cir. 1982) (al

legation that defendant induced foreign governments not to deal with plaintiff does not trigger act of

state doctrine); Mannington Mills, Inc. v. Congoleum Corp., 595 F.2d 1287, 1293-94 (3d Cir. 1979)

(allegation that defendant induced the grant of foreign patents for anticompetitive reasons does not trig

ger act of state doctrine); Industrial Investment Development Corp. v. Mitsui & Co., Ltd., 594 F.2d 48,

53 (5th Cir. 1979) (allegation that defendant induced government agency to withhold license does not

trigger act of state doctrine); Sage International, Ltd. v. Cadillac Gage Co., 534 F. Supp. 896 (E.D. Mich.

1981) (allegation that defendant induced foreign governments not to buy plaintiff's product does not

trigger act of state doctrine). 52. In re Japanese Electronic Products Antitrust Litigation, 723 F.3d 238, 315 (3d Cir. 1983), rev'd on

other grounds, 475 U.S. 574 (1986); In re Vitamin C Litigation, 810 F. Supp. 2d 522 (E.D.N.Y. 201 l);Ani

mal Science Products, Inc. v. China National Metals & Minerals Import & Export Corp., 702 F. Supp. 320

(E.N.J. 2010), rev'd on other grounds, 654 F.3d 462 (3d Cir. 2011). See Marek Martyniszyn, supra note 23.

53. 632 F.3d at 955 n.16. 54. MOL, Inc. v. People's Republic of Bangladesh, 736 F.2d 1326 (9th Cir. 1984). MOL involved

the commercial exception to FSIA, not the act of state doctrine, and probably no longer is good law as

to that statute. See Republic of Argentina v. Weltover, Inc., 504 U.S. 607 (1992). But the broad scope of

the statutory exception need not be read into the common-law act of state doctrine.

55. 493 U.S. at 405-06 (distinguishing Underhill v. Hernandez, 168 U.S. 250 (1897). See Paul B.

Stephan, International Law in the Supreme Court, 1990 Sup. Ct. Rev. 133, 149-50.

56. The Justice Department's Antitrust Guidelines also recognized this defense. Antitrust Enforce

ment Guidelines, supra note 40, at § 3.32. 57. In several recent cases, district courts have addressed the defense, one holding that it did not

apply and the other that it might apply to some but not all of the defendants' conduct. In each instance,

the court just as easily could have held that the government acts in question did or did not come within

Dunhill's civil law exception to the act of state doctrine. In re Vitamin C Litigation, 810 F. Supp. 2d 522

(E.D.N.Y. 2011); Animal Science Products, Inc. v. China National Metals & Minerals Import & Export

Corp., 702 F. Supp. 320 (E.N.J. 2010), rev'd on other grounds, 654 F.3d 462 (3d Cir. 2011).

58. For the Court's most recent pronouncements, see ZivotofSky v. Clinton, 132 S. Ct. 1421 (2012).

59. The Spectrum court recognized that Congress had considered legislation that would have ap

plied criminal and civil sanctions to the OPEC cartel. The court did not see the prospect of such legisla

tion as undermining an argument based on constitutional capacity of the judiciary, however, because

the envisioned statute would not authorize private civil litigation. 632 F.3d at 653-54 n.15.Why a claim

would become justiciable if the government were to bring it if it were not as long as a private person

asserted it was not explained (and does not seem to have a valid explanation).

Chapter 8 I wish to thank Erin Orndorff, Notre Dame Law class of2013, for her assistance with this chapter.An

expanded version of this chapter is available in the Maine Law Review (65) 1, 2012.

1. Among the "highlights" of this litany of cases is Leegin Creative Leather Prods., Inc. v. PSKS,

Inc., 551 U.S. 877 (2007) (overruling Dr. Miles Med. Co. v.John D. Park & Sons Co., 220 U.S. 373

competition and the state - university of...

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