The Necessity for International Harmonization of Competition Law

Abhimanyu Singh(under the guidance of Mr. Mukul Sharma,

D.D., Economic Division, CCI)Semester IX

NUSRL, Ranchi

Rapid increase in Jurisdictions • At the end of the 1970s only nine jurisdictions had a competition law, and only six of them

had a competition authority in place.• By 1990, there were 23 jurisdictions with a competition law and 16 with a competition

authority.• The number of jurisdictions with competition authorities increased more than 500%

between 1990 and 2013. As of October 2013, about 127 jurisdictions had a competition law, of which 120 had a functioning competition authority.

Stalemate !!• The various systems of competition law have numerous points

of commonality, but also many points of divergence. These divergences occur at substantive, remedial and procedural levels.

• Any state substantially and directly affected by private, economic conduct, wherever occurring, has a legitimate interest in regulating that conduct because it has a legitimate interest in protecting the economic wellbeing of its citizens.

• Unfortunately, this inevitably includes conduct that occurs beyond the state’s territorial borders over which it has often no jurisdiction.

Stalemate !!

• The question which finally arises out of the conflict is – How should these conflicting interests of multiple jurisdictions be resolved?

• If one imagines a spectrum of possibilities, then only two solutions seems possible – a unilateral solution and a global general agreement.

The Unilateral Solution Global Competition

Agreement

The Unilateral Solution

• The unilateral solution involves expansive claims to extraterritorial jurisdiction.

• The only real exponent of this type of realist solution has been the United States.

• Even for a state as powerful as the US, however, the record of success has been patchy.

• In response to US jurisdictional expansionism, states have developed defensive measures that dilute its effect.

The Unilateral Solution (continued)Measures include laws –

– that prohibit cooperation with foreign authorities;

In the wake of the controversy surrounding the aggressive approach toextraterritorial jurisdiction adopted by the US Court of Appeals in ReUranium Antitrust Litigation 617 F 2d 1248 (7th Cir, 1980) (‘Uranium

Case’), evidence-blocking laws were introduced in the United Kingdom,Australia, Canada, New Zealand and South Africa.

– that prohibit local firms from complying with certain foreign awards;

Protection of Trading Interests Act 1980 (UK) c 11; Foreign Extraterritorial Measures Act, RSC 1985, c F-29, s 8 (Canada); Foreign Proceedings (Excess of Jurisdiction) Act 1984

(Australia)

– that enable firms to claw-back damages paid pursuant to foreign competition awards.

Global Competition Agreement• A prospective multilateral competition agreement with binding rules and

some form of supranational enforcement mechanism.• Competition rules put on the agenda at WTO in 1996.• A WTO Working Group was set up to ‘study issues raised by Members

relating to the interaction between trade and competition policy’,• Supported by Japan and Canada, opposed vehemently by the United

States.• Reasons for opposition –

A multilateral hard law solution (particularly one that involved supranational dispute resolution)

Fears that multilateral rules would be too interventionist, and that the occasion would be used to emasculate the anti-dumping rules.

Preference was for non-binding, mutual bilateral solutions.

Global Competition Agreement (continued)

• Apparent reasons for failure of any international mechanism –

Different countries want different levels of international antitrust regulation;

Preferred antitrust policy of a country depends, which primarily on 2 factors:

trade patterns of imperfectly competitive goods and services , ability of countries to apply their laws to activities that take place abroad.

Some countries will prefer the status quo to any agreement that imposes stricter regulation, while others prefer the one which weakens agreement.

Need for International Harmonization

• Enforcement of competition law by each nation individually is insufficient because of the international nature of business activities.

• Globalization of economies necessitates that there should be more international cooperation among trading nations with respect to competition law and policy.

• To control the behavior of mammoth multinational or transnational business enterprises, which often get away with anti-competitive practices in developing economies.

The Issue of Extraterritoriality

• "Territoriality" describes the situation in which a country's laws apply only to national activity.

• "Extraterritoriality" refers to a country's ability to govern activity in foreign countries.

The Issue of ExtraterritorialityCASE I:• Lets say, Country X, has minimal power over the behavior of foreign firms, because

they do a small fraction of their business in the country and hold no assets there.• Such a country, even if it threatens to deny access to the national market, will be

relatively powerless to affect the behavior of foreign firms.• Alternatively, a country may simply decide that it does not wish to apply its laws to

conduct that occur abroad, leaving foreign conduct beyond its reach.• This territorialist approach describes the position adopted by the U.S. Supreme

Court in 1909 in American Banana Co. v. United Fruit Co. Stating 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”.

• Holmes, J., writing for the majority, held that the conduct of the defendant was beyond the reach of the Sherman Act, despite the fact that both the plaintiff and the defendant were American corporations, because the acts in question took place in Panama and Costa Rica.

• Under the American Banana case approach, the reach of domestic law is coextensive with the geographic territory of the country. Acts that take place within the physical confines of the country are subject to local law; those acts that occur abroad are not.

The Issue of ExtraterritorialityCASE II:

• While Country Y, is a country in which foreign firms have substantial assets and conduct a large proportion of their business.

• The country's government has considerable leverage against the foreign firms and, should it choose to do so, can regulate the foreign firms' behavior much as it can regulate the behavior of domestic firms.

• If the foreign firms fail to comply with the country's demands, the country can penalize them with monetary sanctions enforceable against firm assets or it can restrict the activities of the firm within the country.

• The United States adopted a policy of applying its antitrust laws to conduct occurring abroad in 1945 in United States v. Aluminum Co. of America (Alcoa).

• Learned Hand, J., ignoring the jurisprudence laid down in American Banana case, adopted a new test that permitted the assertion of jurisdiction over acts outside the United States "if they were intended to affect imports and did affect them." This test is generally referred to as the "effects test“.

• Following the Alcoa decision, the United States began a period of aggressive extraterritorial enforcement.

The Issue of Extraterritoriality• Extraterritoriality is a question of degree.• Some countries are able and willing to apply their laws to

‘conduct’ that takes place abroad while others are unable or unwilling to do so.

• This disparity in the approach of countries effects those countries which don’t have the muscle to wrest with their counterparts.

• This situation calls for an urgent need for uniform legislation which may take into account every nation-state in this world under a blanket legislation, so that there is no scope of bullying and subjugation on ground of economic and political competence.

Hartford Fire Case• The United States Supreme Court's in a recent decision regarding the international

reach of U.S. antitrust laws, Hartford Fire Insurance Co. v. California, is an excellent example of conflicting cross border antitrust issues.

• In Hartford Fire, the plaintiffs, 19 states and numerous private parties alleged that the defendants, including certain London based reinsurers, had violated the Sherman Act.

• The defendants asked the Court to decline jurisdiction on international comity grounds. as the laws of the United Kingdom permitted the anti-competitive conduct in question, while the laws of the United States forbade it.

• Let us consider the competing interests of the United States and Britain in this case. The United States, on the one hand, had an interest in over-regulating the activity because the harmful effects of the activity would be felt in the United States while the profits would remain in Britain. Britain, on the other hand, had an incentive to under-regulate for the same reason.

Hartford Fire Case• Rather than explicitly ruling on the role of comity, the US Supreme Court

held that comity is relevant only if there is a "true conflict" between US law and the law of the foreign state, and a true conflict does not exist if a “person subject to regulation by two states can comply with the laws of both“.

• The case extends the extraterritoriality of American law and ensures that, if the laws of the United States and those of another country regulate the same activity, the stricter of the laws will govern a case like Hartford Fire.

• The Court's decision to maintain jurisdiction ensured that the toughest law would govern, thereby favoring the interests of the U.S. government in this particular case.

Different Rationale !!!• The Court's decision in Hartford Fire also ignores the well-established canon of

interpretation that statutes should not be construed to apply extraterritorially to conflict with foreign local law.

• Although U.S. antitrust law has been applied to foreign conduct, the "canon of construction“ against extraterritorial application prevents application of other U.S. laws to events abroad.

• Souter's, J., opinion fails to address why the antitrust laws should be treated differently.

• In Equal Employment Opportunity Commission v. Arabian American Oil Co. (Aramco), the Supreme Court ruled that Title VII of the Civil Rights Act of 1964 does not apply extraterritorially to prohibit discrimination in Saudi Arabia against a U.S. citizen by a Delaware corporation.

• The employee alleging discrimination, though born in Lebanon, was a naturalized U.S. citizen, employed in Houston by a wholly-owned subsidiary of Arabian American Oil Co., before being transferred at his request to Saudi Arabia.

Different Rationale !!!• In rejecting the application of U.S. law to the foreign conduct,

the Court relied on the canon of construction that charmed Holmes, J., in American Banana case, "Legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States”.

• In contrast to the facts in Aramco case, application of U.S. law to the defendants in Hartford Fire was explicitly objected to by the foreign state as an unwarranted interference with its own comprehensive regulation of the defendants.

• Thus, there was a greater impetus for the Court to exercise judicial restraint when considering the proper reach of the Sherman Act under the facts of Hartford Fire than under the facts of Aramco.

Implications of Hartford Fire Case• To understand the danger in the Court's decision, imagine a variation of the

facts of Hartford Fire in which all the defendants and almost all the plaintiffs are British. Assume the few remaining plaintiffs are American.

• Going by the present judgment, even though the United States, through the American plaintiffs, represents only a small part of the market, the defendants are still required to comply with the laws of both Britain and the United States.

• Consequently, the stricter of the two laws will govern, and United States would have assumed jurisdiction and given a judgment which would have adverse effect on the British parties of the case.

• However, if Court could have acted as per the doctrine of international comity, it would have declined the jurisdiction of United States on the ground that Britain has a greater interest in the case.

• Thus the final judgment of the case would have been quite different from the Hartford case, if the issue would have been settle in Britain.

Implications of Hartford Fire Case• By refusing to engage in comity analysis, the US Supreme

Court kept jurisdiction in the United States and allowed American interests to prevail, i.e., they adopted the welfare enhancing approach in tackling the case.

• This is why the United States would not want a ‘negotiated agreement ‘ to govern this case.

• Because a negotiated agreement would take into account the welfare of all relevant parties, leading to an increase in global welfare, which US will not like as it will reduce the welfare of United States.

Domestic Protection = International Exploitation

• The analysis to this point has assumed that countries regulate their own producers in the same way that they regulate foreign producers.

• However this is a false conclusion.• Most western countries with antitrust laws often have explicit exemptions for firms that

export all of their production and, therefore, do not affect domestic consumers.• In the United States, for example, the Webb-Pomerene Act, passed in 1918, exempts trade

associations formed "for the sole purpose of engaging in export trade" from the reach of the Sherman Act.

• The Act, thus, provides an explicit exemption for export cartels. • In an effort to expand the availability of the exemption for export cartels, Congress even went

to the extent of enacting Title III of the Export Trading Company Act of 1982.• Under the Act, the Secretary of Commerce may, upon request, issue a "Certificate of Review"

to any U.S. person (as defined in the Act) engaged in export trade.• The certificate gives the holder protection against treble damage liability and criminal

prosecution for the conduct detailed in the certificate and creates a presumption of legality for covered conduct. A certificate also allows the holder to recover legal costs from an unsuccessful plaintiff.

Domestic Protection = International Exploitation

• These exemptions allow exporters to engage in behavior that would not be permitted within the country.

• But, the government has an incentive to under-regulate such behaviors because the costs of the behavior of exporting firms are borne by foreigners while the benefits are enjoyed domestically, .

• By issuing antitrust exemptions to pure exporters, countries can achieve this policy objective without compromising the laws applied to domestic consumption.

• The question which arises out of such situation is:“What shall be expressly done so as to restrict such nations from engaging in any international anticompetitive conduct?”

Tried, Tested & Failed Measures• Improved bilateral co-operation, for example to allow exchanges of confidential

information between enforcers;• Developing standards for legislative/regulatory frameworks that would enable

sharing of information and include legislative protections for information received from counterpart regulators;

• Developing common form waivers and suggestions to facilitate the use of such waivers;

• Adopting multi-lateral instruments that address the most pressing needs for co-operation. These could relate, for example, to sharing information, merger notification, or convergence of leniency policies for cartel investigations;

• Developing international standards for formal comity, such as a legal instrument defining criteria for requesting an enforcement action in or assistance to another authority, and clarifying participating authorities’ comity obligations;

• Allowing authorities to choose to recognize the decisions of other competition authorities in the investigation of cross-border matters. There could even be an agreement for giving non-binding deference to one ‘lead authority’; and

• Reaching a multi-lateral agreement for exchange of information, comity and deference standards based on jurisdictions voluntarily opting in to the agreement.

Proposed Models for International Harmonization of Competition Law

There are three probable models that might be followed by the nation-states in order to harmonize national competition laws:

i. legally binding, or "hard" harmonization;ii. persuasive, or "soft" harmonization; andiii. intermediate harmonization achieved through

binding consultation agreements and commitments to generalized "best practices.

Legally Binding (Hard) Harmonization

• This type of harmonization is exactly what the Member States of the European Union have achieved.

• There is a true supra-national government operating in Brussels, and the Competition Directorate of the European Commission administers its antitrust laws.

• Principles of the supremacy of EU law over national laws have now been established for many years.

• The competition rules of the EU have "direct effect" on the citizens and enterprises of the Member States, and the national courts and enforcement institutions are obliged to render whatever assistance is necessary to the EU bodies.

Persuasive (Soft)Harmonization• This type of harmonization describes what the OECD has

accomplished over the years through its Competition Law and Policy Committee.

• This Committee conducts studies of various anticompetitive practices, holds roundtables for discussions of issues of interest to the member countries, and from time to time recommends to the OECD Council agreed statements of policy like the one concerning hard core cartels.

• Both under the umbrella of the OECD and otherwise, many member states have entered into bilateral cooperation agreements that oblige authorities in each to notify the other when enforcement proceedings affecting its interests are underway and to render legally permissible assistance (normally not including the exchange of confidential information).

Intermediate Harmonization• Intermediate harmonization is a form of harmonization, wherein, the

parties in dispute settle their issues at mutually agreed third party or any international forum.

• The example of NAFTA can be taken as a model, however, it does not includes antitrust issues in its domain.

• Its three parties (United States, Canada and Mexico) refer their trade disputes to the North American Free Trade Agreement, or NAFTA.

• Chapter 15 of NAFTA obliges each party to “adopt or maintain measures to proscribe anti-competitive business conduct and take appropriate action with respect thereto”.

• Chapter 15 also obliges the parties to cooperate with one another and to coordinate their enforcement efforts.

Thank You