The Foreign Trade Antitrust Improvements Act, Twombly & Iqbal: Is Compliance Practical?

On September 23, 2011, the Seventh Circuit Court of Appeals dismissed a case brought by a group of corporations that filed an antitrust suit against the major players in the potash industry, ruling that plaintiffs failed to allege specific facts sufficient to plead a plausible “direct, substantial, and reasonably foreseeable” connection between the alleged foreign anticompetitive activity and the domestic potash market. As the Foreign Trade and Antitrust Improvements Act (“FTAIA” or “Act”) develops through case law, antitrust lawyers and academics hoped that this latest case, Minn-Chem Inc. v. Agrium Inc., would provide more guidance in interpreting the Act's three-step test. However, it seems that this case spurred more questions than answers.

The FTAIA limits enforcement of U.S. antitrust laws in situations where there are no clear effects on U.S. consumers. The Act aims to regulate foreign trade or commerce with foreign nations via a three-step test: (1) Did the conduct involve U.S. import trade or import commerce? (2) If not, does the conduct involve trade with foreign nations? and (3) If the conduct involves trade with foreign nations, does it have a “direct, substantial, and reasonably foreseeable effect” on the U.S. market?

Minn-Chem Inc. v. Agrium Inc. Background

In this class action suit, two groups of plaintiffs similarly alleged general and specifics examples of how the seven main competitors in the potash industry engaged in parallel business conduct in three foreign markets (Brazil, China, and India), which ultimately adversely affected those who directly or indirectly purchased potash products in the United States. The plaintiffs alleged that from 2003-2008, potash prices in the United States increased by roughly 600% as a result of an agreement by the defendants to jointly restrict output and to increase prices as exemplified by parallel business conduct in these foreign markets. The plaintiffs dismissed any notions that this price increase may be attributed to rising production costs or increased demand because the demand fell for much of the period, and the defendants had excess capacity.

Plaintiffs further argued that as global demand for potash declined during the second half of 2005, the defendants “jointly restricted” the output of potash to maintain an artificially high price. For instance, in the last two months of 2005, after defendant company Potash Corporation of Saskatchewan (“PCS”) announced the shutdown of three of its mines, which removed 1.34 million tons from the market, co-defendant The Mosaic Company (“Mosaic”) also announced a temporary 200,000 ton reduction in potash production. Based on this pronouncement and other similar events, the plaintiffs contended that “had the market truly been competitive, defendants would have the incentive to increase, not suspend, production to take advantage of their competitor's reduced output and thus gain market share.”

The defendants moved to dismiss the Sherman Act claim based on the Federal Rules of Civil Procedure Rule 12(b)(1) and Rule 12(b)(6) for lack of subject-matter jurisdiction under the FTAIA and for failure to state a claim upon which relief could be granted. The defendants argued that the FTAIA barred the court from having subject-matter jurisdiction over this case. Additionally, the defendants argued that the plaintiffs' complaint did not plausibly state an antitrust claim under the pleading standard in Twombly and Iqbal and must be dismissed under Rule 12(b)(6).

Seventh Circuit Court's Analysis: “Import Commerce Exception” v. Direct-Effects Exception

The court reasoned that the threshold issue concerned the applicability of the FTAIA rather than the broader issue of whether the complaint sufficiently met the Twombly and Iqbal standards. In applying the FTAIA to the facts alleged in the complaint, the Seventh Circuit found that the district court erred in reasoning that a “tight nexus” existed between the alleged illegal conduct and the defendants' import activities because the defendants imported potash into the United States and were accused of conspiring to fix the price of potash globally. Rather, the Seventh Circuit noted that there is a distinction between conduct that “'involves' import commerce and conduct that 'directly, substantially, and foreseeably' affects such commerce.” Further, the court explained that the “import commerce” exception and the “direct effects” exception must be analyzed separately and not be conflated.

The direct-effects exception applies in cases where foreign anticompetitive conduct has a “direct, substantial, and reasonably foreseeable effect” on the U.S. domestic or import commerce regardless of whether the conduct actually “involved” the U.S. import market. In other words, was the defendants' alleged anticompetitive behavior directed at an import market?

Because of the dearth of case law interpreting the statute, the Seventh Circuit relied on the Ninth Circuit's analysis of a similar term in the Foreign Sovereign Immunities Act. The Ninth Circuit explained the term “direct” as “an effect [that] cannot be direct[ed] where it depends on . . . uncertain intervening developments.” As a result, the court concluded that the complaint did not contain sufficient factual content to plead a plausible “direct, substantial, and reasonably foreseeable” connection between the alleged foreign anticompetitive activity and the domestic potash market and dismissed the case.

Lessons Learned

From the presented facts, the plaintiffs attempted to show an independent and distinct antitrust injury in the United States by highlighting the approximately 600% price increase of potash in the U.S. market. The plaintiffs sought to provide additional facts only by explaining the general characteristics of the potash industry that lent itself to making agreements to conspire. This information was supplemented with a focus on the Brazilian, Chinese, and Indian markets to show that potash prices in these foreign markets served as “benchmarks” for potash sales in the United States. Though the plaintiffs pointed to an independent and distinct antitrust injury in the U.S., the complaint was nevertheless dismissed.

The court reasoned that the plaintiffs made both general and specific factual allegations, they did not tie these facts back to the antitrust injury suffered by the United States. For instance, the plaintiffs highlighted supply and pricing activities in Brazil. After JSC International Potash Company (“IPC”) announced a price increase in Brazil, Canpotex Ltd. (the joint export marketing and distribution company of potash jointly owned by PCS and Mosaic) followed suit shortly thereafter. Based on the opinion, the plaintiffs did not tie this specific instance to a direct impact to the United States or explain how it could have reasonably impacted the U.S. potash market. Rather, the plaintiffs merely stated the facts and left the court to make the connection itself.

While it is true that this new standard may be difficult to reach without discovery, future plaintiffs alleging similar antitrust violations under the FTAIA may find it advantageous to ensure that the complaint contains specific facts that directly connect the effects of global antitrust misconduct to U.S. injury. Taking this extra step could aid the process of successfully meeting the FTAIA and Twombly/Iqbal standards.

Hauwa Otori
(202) 589-1834
hotori@dbmlawgroup.com