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The Domestic Effect Exemption

Eva Kurban and Angelo M. Russo

The Domestic Effect Exemption
dra_schwartz via Getty Images

In 2021, the U.S. Department of Justice (“DOJ”) charged Jean Paul Van Avermaet and three co-defendants with conspiring to rig bids for government contracts in violation of Section 1 of the Sherman Act. From an antitrust perspective, the case is noteworthy because it brought an uncommonly-raised antitrust exemption to the forefront of practitioners’ minds: the Foreign Trade Antitrust Improvements Act (“FTAIA”). The FTAIA creates exceptions to the general rule that the Sherman Act does not reach anticompetitive conduct that causes only foreign injury. As discussed below, the Van Avermaet case provides a succinct analysis regarding the scope of “conduct” considered under the FTAIA and explains the distinction between applying the FTAIA in criminal actions versus private civil actions.

I. Foreign Trade Antitrust Improvements Act

DOJ actively upholds the Sherman Act to prevent anticompetitive practices, both domestically and globally. The Sherman Act serves as a robust legal framework aimed at curbing such behaviors, extending its reach beyond U.S. borders. The FTAIA plays a critical role in governing international antitrust enforcement efforts by constraining the application of the Sherman Act in cases involving foreign alleged conspiracies and conduct. Until the enactment of the FTAIA, there was no consensus of how far the Sherman Act could reach into foreign trade or commerce.

The 1993 Supreme Court case, Hartford Fire Insurance Co. v. California, explains that the FTAIA’s aim is “to exempt from the Sherman Act export transactions that do not injure the U.S. economy.” The FTAIA delineates that Sections 1 to 7 of the Sherman Act, which prohibit collusion agreements among competitors and attempts to monopolize, do not extend to conduct related to trade or commerce with foreign nations, unless such conduct has a “direct, substantial, and reasonably foreseeable effect” on U.S. commerce.

Fundamentally, the FTAIA establishes that the Sherman Act’s jurisdiction does not extend extraterritorially – with two limited exceptions. The first, commonly known as the import commerce exception, allows the Sherman Act to apply if the alleged anticompetitive behavior targets import trade or commerce, regardless of whether the party involved in the conduct is the importer.

The second exception, referred to as the effects exception, permits the application of the Sherman Act to alleged anticompetitive conduct involving trade or commerce (other than import trade or commerce) with foreign nations when two prerequisites are met: (a) the alleged conduct must have a “direct, substantial, and reasonably foreseeable effect” on domestic U.S. commerce or U.S. import trade, or on the export trade or export commerce of a person engaged in such trade or commerce in the United States, and (b) the “direct, substantial, and reasonably foreseeable effect” must give rise to a claim under the Sections 1 to 7 of the Sherman Act.

Courts have developed different interpretations of the “direct, substantial, and reasonably foreseeable effect” language, particularly regarding what constitutes a “reasonably foreseeable” effect. Notably, there is no defined threshold for what qualifies as a “substantial effect” and some courts have found that even minimal impacts on U.S. commerce may suffice. Courts also differ in their interpretation of what effects qualify as “direct” under this exception.

II. Recent Enforcement Action: United States v. Jean Paul Van Avermaet

In United States v. Jean Paul Van Avermaet, DOJ alleged an anticompetitive conspiracy among several Belgian security providers. More specifically, DOJ charged Mr. Van Avermaet and three co-defendants with conspiracy to rig bids and fix prices for contracts (with the U.S. Department of Defense and with NATO) to provide security services on military bases in Belgium.

Van Avermaet moved to dismiss the “portion” of his one-count indictment related to the alleged bid rigging of NATO contracts for lack of subject matter jurisdiction. He argued that, under the FTAIA, the alleged bid rigging of NATO contracts was foreign conduct that Congress excluded from the scope of the Sherman Act. The magistrate judge recommended that the motion be denied, and Van Avermaet appealed to the district court.

On appeal before the district court, the parties disagreed over the meaning of “conduct” under the FTAIA and specifically over the level of generality at which the court should analyze the acts charged in the Indictment. Van Avermaet argued that the anticompetitive conduct involving the NATO contracts should be dismissed for failing to qualify for the “domestic effects” exception to the FTAIA because NATO is a foreign entity. He did not dispute that the anticompetitive conduct involving contracts with the Department of Defense satisfied the domestic-effects exception.

The district court held—consistent with DOJ’s argument—that the allegedly rigged bids for Department of Defense contracts subjected the entire conspiracy, including the bid rigging of NATO contracts, to criminal prosecution under the Sherman Act. As DOJ argued, the “conduct” for the purposes of the domestic-effects exception “is the single, overarching conspiracy alleged in the Indictment,” which had a domestic effect based on the Department of Defense contracts.

The district court rejected Van Avermaet’s argument that the domestic-effects exception must be satisfied on a transaction-by-transaction basis, and that non-qualifying aspects of the conspiracy’s conduct must be excluded.

III. FTAIA’s Scope – Criminal Enforcement Versus Civil Enforcement

The district court also recognized that the government has greater latitude under FTAIA to bring a criminal indictment addressing anticompetitive conduct that affects both domestic and international consumers. On appeal, Van Avermaet cited civil antitrust cases where courts engaged in a contract-by-contract analysis to dismiss the parts of a single antitrust conspiracy that concern foreign commerce claims barred by the FTAIA and to allow the remaining parts of the conspiracy to proceed. While it acknowledged that courts may apply a more targeted review of “conduct” under FTAIA in a private civil action, the district court held that government enforcement actions are distinct. The district court relied on Motorola Mobility LLC v. AU Optronics Corporation, noting that in the context of a civil claim, the Seventh Circuit held it was proper to parse the conspiracy on a transaction-by-transaction basis. However, the Seventh Circuit made clear that “the criminal and injunctive provisions of the Sherman Act applied to all defendants’ price fixing conduct.” The district court also relied on additional instances in which a conspiracy was charged “with both domestic and foreign effects in a single-count indictment,” including a conviction ultimately affirmed in United States v. Hsiung.

The distinction recognized by the district court is grounded in the language of the FTAIA—specifically, its requirement that the foreign conduct having the requisite effect on domestic commerce also “give[] rise to a claim” under the Sherman Act. The Supreme Court has construed the “gives rise to a claim” language to require that the conduct give rise to the claim of the particular enforcer (government or private plaintiff) claiming the exception. In other words, it does not suffice for the domestic-effects exception that the conduct “give rise to ‘a’ claim” if it is “someone else’s claim.” This can impose a limitation on private claims that would not apply to government enforcement, as the Sherman Act “can apply and not apply to the same conduct, depending upon other circumstances. . . includ[ing] the nature of the lawsuit (or of the related underlying harm).” A private antitrust damages suit, for instance, arises only when the private plaintiff is “injured in his business or property by reason of” the Sherman Act violation. By contrast, government enforcement actions—whether a criminal prosecution or “proceedings in equity to prevent and restrain [Sherman Act] violations,” 15 U.S.C. § 4—do not require any private injury. Instead, the government may act in its sovereign capacity to punish or enjoin a violation of its laws.

The views stated herein are presented on behalf of The Exemptions and Immunities Committee. They have not been reviewed or approved by the House of Delegates or the Board of Governors of the American Bar Association and, accordingly, should not be construed as representing the position of the American Bar Association.