Supreme Court Leaves in Place Third Circuit Rule Welcoming Challenges to Foreign Conduct into U.S. Courts

This week the U.S. Supreme Court announced it would not review a Third Circuit decision (Animal Science) that made it easier for antitrust plaintiffs to bring claims in U.S. courts for conduct occurring overseas under the Foreign Trade Antitrust Improvements Act (“FTAIA”). The Supreme Court’s decision to deny review means that the plaintiff-friendly rule remains the law, at least in the Third Circuit and also in the Northern District of California (which in the LCD (Flat Panel) Antitrust Litigation case followed the Animal Science approach. (See our prior alert on these cases.)

The FTAIA provides that the Sherman Act does not reach conduct outside the United States, with a few exceptions. Specifically, the statute bars challenges to conduct involving trade or commerce (other than import trade or commerce) with foreign nations unless the conduct (1) has a “direct, substantial, and reasonably foreseeable” effect on U.S. domestic commerce or on import commerce and (2) that effect “gives rise to” a Sherman Act claim. The Third Circuit ruled in Animal Science that a plaintiff pleading an exception to the FTAIA’s bar on challenges to foreign conduct did not have to prove the court’s subject matter jurisdiction at the pleading stage; it only had to plead an exception to the bar consistent with Rule 12(b)(6). As a result, defendants in lawsuits filed in the Third Circuit and in other courts (including the Northern District of California) following Animal Science no longer have the automatic right to challenge the evidentiary basis for a plaintiff’s claim of an exception to the FTAIA’s bar – but have to delay any such challenges to the summary judgment stage.

This difference has a practical consequence for defendants in cases challenging foreign conduct. As long as a plaintiff can plead that foreign conduct has the requisite effects sufficient to meet the FTAIA exception and as long as that pleading survives a motion to dismiss, defendants likely will have to wait until the end of discovery to show that the plaintiff cannot prove the FTAIA exception. The result under the Animal Science approach is longer and more costly litigation.

Determining why the Supreme Court denied review is a tea-leaf-reading exercise. Certainly, the plaintiffs in Animal Science claim not to have been surprised – indeed, they didn’t even file an opposition to the cert petition, a confident, if not unheard-of approach, since the Court typically requests an opposition if it believes there is something worth considering. Here, there obviously wasn’t, at least not based on the current state of the law as the Supreme Court saw it.

Attention now shifts to the recent decision by a Seventh Circuit panel in Minn-Chem (Potash), which last fall addressed the FTAIA’s “import commerce” exception. The panel decision noted that the Seventh Circuit’s earlier decision in United Phosphorous (which unlike Animal Science treated the FTAIA as a limitation on subject matter jurisdiction and therefore subject to Rule 12(b)(1) motions where a defendant can challenge the evidentiary basis for the claim) had been called into question, but left that earlier decision alone (at least for now). The Seventh Circuit panel decision nonetheless has drawn interest from the antitrust enforcement agencies and others in light of the panel’s limitation of the “import commerce” exception to foreign conduct that is directed or targeted at import commerce (which can be hard to prove, for example, in the case of a foreign conspiracy involving product components that are then sold to foreign producers of finished products that are then sold into the United States). Just last month, the entire Seventh Circuit heard oral argument on Minn-Chem, so more guidance regarding the FTAIA will come from that court. Among its options, the Seventh Circuit may decide whether to keep its old United Phosphorous rule or move to a more plaintiff-friendly rule like Animal Science. It may also relax the panel’s approach to the “import commerce” exception, which will make the FTAIA even more plaintiff friendly.

All of this is not necessarily good news for defendants, at least not in the Third Circuit and certain other courts (and maybe not even in the Seventh Circuit – we’ll have to wait and see). Pending additional guidance from the Seventh Circuit and other Courts of Appeals, which may create a true Circuit conflict on the 12(b)(1) versus 12(b)(6) issue and make it arguably more attractive for Supreme Court review, defendants will face difficulties getting rid of U.S. challenges to foreign conduct in a number of jurisdictions as long as plaintiffs can creatively plead the necessary exception to the FTAIA’s bar on challenges to foreign conduct.