Extra-territoriality

 

Author Definition

 

Definition

Extraterritorial reach of competition laws refers to the extent to which jurisdictions are permitted to apply their domestic laws to conduct that occurs outside their jurisdiction, including the reach of remedies (i.e., prohibitions or requirements on foreign conduct or with respect to foreign assets).

 

Commentary

Most major jurisdictions apply some sort of effects test comparable to that specified in the U.S. Foreign Trade Antitrust Improvements Act (FTAIA), which provides that foreign conduct is outside the scope of the Sherman Act (which governs monopolization and restraints of trade) unless it: (1) sufficiently affects American commerce, i.e., “has a direct, substantial, and reasonably foreseeable effect” on American domestic, import, or (certain) export commerce; and (2) has an effect of the kind the Sherman Act considers harmful, i.e., the effect must give rise to a Sherman Act claim. Section 5(a)(3) of the Federal Trade Commission (FTC) Act (which governs “unfair methods of competition”) closely parallels the FTAIA. Although the FTAIA does not address the reach of the Clayton Act (which primarily governs mergers and acquisitions), the Department of Justice (DOJ) and FTC have said they apply the same principles set forth in the FTAIA and case law interpreting the FTAIA. For a summary of the approaches taken in Brazil, Canada, China, India, Japan, Korea, and Taiwan, see Heimert & Wong-Ervin.

The leading case in the United States is the Supreme Court’s 2004 decision in F. Hoffman-La Roche Ltd. v. Empagran S.A., which involved price fixing by vitamin sellers in other countries that led to higher prices both in the United States and, independently, in other countries such as Ecuador and Ukraine. The Court held that a purchaser in the United States could bring a Sherman Act claim under the FTAIA based on domestic injury, but purchasers in other countries could not bring claims based on foreign harm arising from foreign conduct. This decision was reached, in part, because principles of comity recognize that foreign sovereigns have a legitimate interest in regulating their own commercial affairs.

In Motorola Mobility LLC v. AU Optronics Corp. (2015), the U.S. Court of Appeals for the Seventh Circuit held that purchases by a U.S. company’s foreign subsidiaries of price-fixed goods that were incorporated into products subsequently shipped to the U.S. parent did not give rise to damages claims under the Sherman Act. The court’s analysis was largely rooted in the fact that Motorola purposefully established subsidiaries in foreign countries to obtain favorable tax treatment. This tax-driven choice of corporate domicile carried with it access to whatever remedies the foreign countries offered (or did not offer) for supposed wrongs. In addition, although Motorola ultimately received products incorporating the price-fixed goods in the United States, it could not recover on this basis due to the indirect purchaser doctrine, “which forbids a customer of the purchaser who paid a cartel price to sue the cartelist, even if his seller—the direct purchaser from the cartelist—passed on to him some or even all of the cartel’s elevated price.”

The European Union applies either a “qualified effects” test (reasonably “foreseeable” of having “immediate and substantial” effects in the European Union) or an “implementation” test (focusing on where the conduct is implemented, rather than the location of the undertaking). The Court of Justice of the European Union in its Intel decision (2017) clarified that the two tests pursue the “same objective, namely preventing conduct which, while not adopted within the EU, has anticompetitive effects liable to have an impact on the EU market.”

In Intel, the court upheld jurisdiction of EU institutions over conduct by an American company (Intel) with respect to, inter alia, chip sales to a Chinese company (Lenovo) in China, when the conduct was alleged to have harmed another American company (Advanced Micro Devices or AMD). As concerned sales of chips to Lenovo, only a few thousand of the finished products (computers assembled by Lenovo in China) were implicated (i.e., they allegedly would potentially have included an AMD chip had Intel not induced the breach of contract), and it was unclear if and how many reached the European Economic Area (EEA). In determining whether Intel’s conduct was “capable” of having a “substantial, immediate and foreseeable effect” within the EEA, the court held that it was sufficient to consider the “probable effects” of the conduct on competition and that “Intel’s conduct vis-à-vis Lenovo formed part of an overall strategy aimed at foreclosing AMD’s access to the most important sales channels.”

In addition to applying some sort of effects test, most major jurisdictions also take into consideration comity concerns, both in deciding whether to apply domestic laws to foreign conduct and whether to impose extra-jurisdictional remedies. As the DOJ and FTC explained in their 2017 International Guidelines, comity refers to the “broad concept of respect among co-equal sovereign nations and plays a role in determining ‘the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation.’”

The DOJ and FTC assess comity by considering the (1) existence of a purpose to affect or an actual effect on U.S. commerce, (2) significance and foreseeability of the effects on the United States, (3) degree of conflict with the foreign jurisdiction’s law or articulated policy, (4) extent to which the enforcement activities or remedies of another jurisdiction may be affected, and (5) effectiveness of foreign enforcement compared to U.S. enforcement. U.S. courts have considered additional factors, including the parties’ nationalities or allegiances and principal places of business, the possible effects of extraterritorial jurisdiction upon foreign relations, and whether an order for relief would be acceptable in the United States if the roles were reversed.

With respect to remedies, as the DOJ and FTC explained in a 2017 OECD Note, their “general practice is to seek an effective remedy that is restricted to the United States, which the Agencies believe is the best approach,” considering broader remedies “[o]nly when a domestic remedy cannot effectively redress the harm or threatened harm to U.S. commerce or consumers.” In cases involving intellectual property, "the Agencies generally rely on a domestic-only licensing remedy because the license can be tailored to permit use of the intellectual property only in the domestic markets affected by the conduct. However, in rare cases, when a broader license may be necessary to provide effective relief, the Antitrust Agencies seek a remedy that is no broader than necessary."

This is consistent with the approaches taken by the European Union and China. For example, in the European Commission’s 2014 settlement with Samsung and separate decision against Motorola Mobility, the Commission limited its remedy to conduct occurring in the EEA, and only on patents granted in the EEA. Likewise, China’s 2015 penalty decision against Qualcomm was limited to remedies on conduct occurring within China and related to Chinese patents. In contrast, is the highly controversial 2016 decision by the Korea Fair Trade Commission to impose a global licensing remedy on Qualcomm Incorporated. The remedies included prohibitions and requirements on patents not registered or enforceable in Korea.

 

Bibliography

U.S. Dep’t Of Justice & Fed. Trade Comm’n, Antitrust Guidelines For International Enforcement And Cooperation (Jan. 13, 2017).

OECD Roundtable on the Extraterritorial Reach of Competition Remedies (Dec. 5, 2017).

Koren Wong-Ervin & Andrew Heimert, Extraterritoriality: Approaches Around the World and Model Analysis (Jan. 6, 2020), for Concurrences Book Honoring Eleanor Fox (forthcoming).

Koren W. Wong-Ervin, Bruce H. Kobayashi, Joshua D. Wright, & Douglas H. Ginsburg, Extra-Jurisdictional Remedies Involving Patent Licensing (Dec. 14, 2016).

Abbott B. Lipsky, Jr. & Kory Wilmot, The Foreign Trade Antitrust Improvements Act: Did Arbaugh Erase Decades of Consensus Building? (Aug. 2013).

Authors

Quotation

Koren Wong-Ervin, Melanie Kiser, Extra-territoriality, Global Dictionary of Competition Law, Art. N° 12254

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Institution Definition

Term normally used to describe the exercise by a sovereign state of jurisdiction over foreigners in respect of acts done outside the borders of that state. One could say that - in a very broad sense - the EU applies its competition rules in an extra-territorial manner when it makes use of the effects doctrine. European Commission

Refers to the application of one country’s laws within the jurisdiction of another country. In the context of competition policy, the issue of extraterritoriality would arise if the business practices of firm(s) in one country had an anticompetitive effect in another country which the latter considered to be in violation of its laws. For example, an export cartel formed by companies which may be exempt from competition laws of country A may nevertheless be viewed as a price-fixing agreement to limit competition in markets of country B and in violation of the latter country’s antitrust laws. Another situation that could arise is a merger between two competing firms in one country resulting in substantial lessening of competition in the markets of another country. (This can arise if the merging companies are primarily export-oriented and account for the bulk of the market in the importing country.) Whether or not companies can be successfully prosecuted for violations of competition laws of another country is importantly dependent, among other factors, on the nature of the sovereign relationship between the countries involved, where the alleged violation has taken place, the legal status of the business practice or action in the originating country and the existence of subsidiary operations and significant assets in the affected country against which legal actions can be brought forward. © OECD

 
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