THE DIG ON RARE EARTH METALS:

CHINESE CARTEL-LIKE BEHAVIOR & THE SHERMAN

ACT

CHARLES LUDD, JR.*

INDEPENDENT LEGAL WRITING**
SPRING 2011
JD CANDIDATE – EXPECTED MAY 2011
THE GEORGE WASHINGTON UNIVERSITY LAW SCHOOL

*Charles Ludd, Jr. is a May 2011 Juris Doctor Candidate at The George Washington University Law School.

**This paper was written independently by Charles Ludd, Jr., pursuant to enrollment in Independent Legal Writing.
This paper is not published, and may not be copied, edited, published, or republished without the written permission
of Charles Ludd, Jr. or The George Washington University Law School.
TABLE OF CONTENTS

Introduction ..................................................................................................................................... 3
I. United States Antitrust Law – The Sherman Act .................................................................... 7
Cartels and Anticompetitive Behavior ........................................................................................ 9
Entities Who May Be in Violation ............................................................................................ 10
Extraterritorial Reach of U.S. Antitrust Law ............................................................................ 11
II. Domestic State Action Immunity .......................................................................................... 13
III. The Comity Constraint ....................................................................................................... 15
Conflicts Between U.S. Antitrust Law and Foreign Law ......................................................... 16
The Foreign Sovereign Immunities Act .................................................................................... 18
Applicability of the FSIA to Agencies and Instrumentalities ................................................... 23
Foreign Sovereign Compulsion................................................................................................. 24
Act of State Doctrine ................................................................................................................. 25
IV. The Sherman Act and Chinese Rare Earth Metal Exporters.............................................. 27
The Jurisdiction Hurdle ............................................................................................................. 28
V. Conclusion ............................................................................................................................. 36

2
INTRODUCTION

Rare earth metals (“rare earths”) are a group of 15 metallic elements which are found in

relatively small concentrations within the earth‟s rock formations.1 Over 97% of the global

supply of rare earths is mined in China.2 Rare earths have multiple high technology applications

including use in liquid crystal display screens, fiber optic cables, superconductors, batteries and

hydrogen transportation.3 Though some rare earth elements are 200 times more abundant than

gold, the metals are rarely found in concentrations large enough to exploit.4 Moreover, due to

their high technology applications, rare earth metals are used in the manufacture of defense

goods including precision guided weapons, and radars.5 Realizing the strategic importance of

controlling elements with such high-tech applications, the Chinese government began to invest in

state-owned mines which are able to produce rare earth metals at a much lower cost than private

mines.6

1
GORDON B. HAXEL, JAMES B. HEDRICK, AND GRETA ORRIS, RARE EARTH ELEMENTS CRITICAL
RESOURCES FOR HIGH TECHNOLOGY, USGS Fact Sheet #087-02, 1, (2002), available at:
http://pubs.usgs.gov/fs/2002/fs087-02/ [hereinafter USGS Rare Earth Fact Sheet].
2
Id. See USGS Rare Earth Fact Sheet, supra note 1 (explaining that causative factors such as:
lower labor and regulatory costs in China; the favorable size of Chinese rare earth deposits; and
the continuing expansion of electronic manufacturing in Asia, led China to dominate the global
market for rare earth metals.); CINDY HURST, CHINA‟S RARE EARTH ELEMENT INDUSTRY: WHAT
CAN THE WEST LEARN?, INSTITUTE FOR THE ANALYSIS OF GLOBAL SECURITY (2010), available at:
http://fmso.leavenworth.army.mil/documents/rareearth.pdf.
3
See USGS Rare Earth Fact Sheet, supra note 1.
4
Id.
5
John Lee, Bejing’s Motives Behind Rare-Earth Metals, FORBES, Jan. 3, 2011, available at:
http://www.forbes.com/2011/01/03/china-rare-earth-opinions-contributors-john-lee.html.
6
Id.
3
 In the Fall of 2010 the Chinese Ministry of Commerce announced that it would reduce

exports of rare earth metals by 35% during the first half of 2011.7 The 2011 cuts followed an

earlier round of export cuts in 2010 which reduced exports to 40% of 2009 levels.8 The Chinese

Government cited both environmental and industrial reasons for the reduction.9 Though China

has attempted to provide reasonable explanations for the decreasing export quotas, its actions

have been characterized by some as an attempt to exploit its dominance in the market for rare

earths.10 More specifically, China‟s conduct has been likened to price fixing and cartel-like

activities.11

In addition to cuts in supply, the Chinese government has participated in talks about

creating more formal price control mechanisms for rare earth exports.12 Under the pricing

mechanism, “. . . a unitary price based upon negotiation will be published once a month to

7
James Regan, China’s Rare Earth Export Cut Spurs Trade Concerns, REUTERS¸ Dec. 29, 2010,
available online at: http://www.reuters.com/article/2010/12/29/us-china-rareearth-
idUSTRE6BR0KX20101229?pageNumber=2.
8
Chris Buckley, China to Cut rare earth quota slightly-Xinhua, REUTERS AFRICA, Nov. 2, 2010,
available online at: http://af.reuters.com/article/metalsNews/idAFTOE6A107M20101102
9
Michael Montgomery, The World Waits for Chinese Rare Earth Quotas, RESOURCE INVESTING
NEWS, Mar. 22, 2011, available online at: http://resourceinvestingnews.com/14302-the-world-
waits-for-chinese-rare-earth-quotas.html (explaining that the Chinese have been reducing quotas
for rare earths at approximately 5% per year until 2010 where the government began to cut
quotas more drastically, ostensibly to prevent environmental degradation.
10
See RAZEEN SALLY, CHINESE TRADE POLICY AFTER (ALMOST) TEN YEARS IN THE WTO: A
POST-CRISIS STOCKTAKE, EUROPEAN CENTRE FOR INTERNATIONAL POLITICAL ECONOMY (2011),
available online at: http://www.ecipe.org/chinese-trade-policy-after-almost-ten-years-in-the-
wto-a-post-crisis-stocktake (“Overall, China‟s policy terms of trade have shifted in the near-
decade since it joined the WTO. It behaves more like a very large, complex economy and less
like a small-to-medium sized open economy. It acts more often like a price-setter than a price-
taker – witness its export restrictions on rare-earth metals”).
11
Id.
12
Zhou Yan, Unified Pricing to buoy rare earth prices, CHINA DAILY, Jul. 8, 2010, available
online at: http://www.chinadaily.com.cn/business/2010-07/08/content_10079916.htm.
4
protect the natural resources from being depleted and to avoid cut throat competition among

certain provinces.13

The United States was once able to self sustain its appetite for rare earths but, due to

growing internal demand, now imports 90% of rare earths from China.14 U.S. dependence on

Chinese rare earth exports means that Chinese restrictions on rare earth exports have a wide

effect on the U.S. domestic economy, including higher gasoline prices.15 In addition to the effect

in the U.S., the Chinese government has been accused of using its market power in rare earth

metals as a method of retaliation against unrelated actions of other states.16

Several mining companies that participate in the Chinese rare earth metal exploitation

and export are state-owned.17 The Chinese government may be involved in efforts to consolidate

the state-owned entities into “two giant state-owned rare earth groups.”18

The European Union has discussed a possible challenge to China‟s rare earth export

restrictions through the framework of the World Trade Organization.19 Though the United States

13
Id.
14
USGS Rare Earth Fact Sheet, supra Note 1
15
Ben Lefebvre, Rare-Earth Ripple Effect Hits Gasoline Producers, WALL STREET JOURNAL
ONLINE, Jan. 10, 2011, available online at:
http://online.wsj.com/article/SB10001424052748704055204576068270214808518.html
(explaining that higher prices in rear earth elements used in the oil refining processes could
increase gasoline prices and lead some refiners to cut back on production to preserve profits).
16
Gal Luft & Yaron Varona, Op-Ed., China’s Rare Earth Monopoly: U.S. Should Restart Mining
to End Vulnerability, THE WASHINGTON TIMES, October 20, 2010, available online at:
http://www.washingtontimes.com/news/2010/oct/20/chinas-rare-earth-monopoly/. The authors
explain that the Chinese government cut rare earth metals to Japan following an incident where
the Japanese detained a Chinese fishing boat captain who collided with a Japanese patrol boat.
The authors cite another incident where a Chinese Ministry of Commerce official “floated the
idea” of whether to immediately terminate the export of some rare earth metals to the United
States.
17
See China Pressing Ahead with Rare Earth Industry Reform, Business China, Jun. 12, 2010,
available online at: http://en.21cbh.com/HTML/2010-6-12/5NMDAwMDE4MjE5Nw.html.
18
Id.
5
can address the issue of export restrictions through the World Trade Organization20, this paper

addresses whether United States antitrust law, specifically the Sherman Act, may be applied to

conduct taking place in China.

The Sherman Act does apply to conduct by Chinese state-owned exporters because, the

exporters are instrumentalities of the Chinese state, Congress has specifically granted antitrust

jurisdiction over exports that effect the United States, and the actions of the Chinese exporters

are purely commercial.

Part I of this paper will provide an overview of the Sherman Act and how it applies to

cartel activity. Part II will discuss a doctrine of domestic state action immunity, where the

Sherman Act has been ruled inapplicable to domestic state action. More specifically, this section

discusses instances where parties are compelled to participate in anticompetitive activity by state

and local governments. This comparison is useful when discussing foreign sovereign immunity,

and the defense of foreign sovereign compulsion. Part III discusses the role comity in choosing

whether or not to rule upon foreign anticompetitive conduct. This section will also discuss the

Foreign Sovereign Immunities act of 1976, and judicial rules of abstention for comity reasons.

Finally Part IV will discuss why the Sherman Act applies to Chinese anticompetitive conduct in

the rare earth metal export market.

19
Juliane von Reppert-Bismarck, WTO opens China to rare earth challenge—sources, REUTERS
AFRICA, March 1, 2011, available online at:
http://af.reuters.com/article/metalsNews/idAFLDE72029E20110301.
20
See Id.
6
 I. UNITED STATES ANTITRUST LAW – THE SHERMAN ACT

United States antitrust law arose as a response to the conflict between a largely rural agrarian

society and a growing concentration of economic power.21 Contemporary economic and social

goals of Antitrust policy include: the prevention of economic oppression, supporting consumer

welfare by ensuring the efficient allocation of society‟s goods and services, promoting

innovation and technological progress, protecting notions of individual fairness, and

decentralized economic power.22

United States policy has long recognized the role of antitrust law in preventing large

harmful concentrations of economic power, and protecting competition.23 U.S. courts, when

hearing antitrust cases, have even gone so far as to call antitrust laws, and the Sherman Act in

particular “. . .the Magna Carta of free enterprise.”24

The Sherman Act of 1890 (“Sherman Act”) is the principle, and most basic, antitrust law

of the United States.25 Section one of the Sherman Act outlaws all unreasonable contracts in

restraint of trade,26 while Section two outlaws monopoly and attempt to monopolize.27

21
LAWRENCE A. SULLIVAN, WARREN S. GRIMES, THE LAW OF ANTITRUST: AN INTEGRATED
HANDBOOK 5 (West Group 2000)(explaining that the rapid industrialization of the second half of
the nineteenth century brought unwelcomed change that threatened the average American notion
of economic equality).
22
Id. at 11-15.
23
See Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 50 (1911) (explaining that the
notes on the debate of the Sherman Act in congress conclusively show that the act was a
response to the economic conditions of the times: the vast accumulation of wealth in the hands of
corporations and individuals, and the enormous development of the corporate organization).
“The heart of our economic policy has long been faith in the value of competition.
24
See Glen Holly Entertainment v. Tektronix Inc., 343 F.3d 1000, 1014-15 (9th Cir. 2003)
(citing United States v. Topco Associates, Inc. 495 U.S. 596, 608 (1972)).
25
See MARK R. JOELSON, AN INTERNATIONAL ANTITRUST PRIMER: A GUIDE TO THE OPERATION
OF UNITED STATES, EUROPEAN UNION AND OTHER KEY COMPETITION LAWS IN THE GLOBAL
ECONOMY 11 (2d ed. 2001) (speaking generally about the Sherman Act).
26
See 15 U.S.C. § 1 (2006); Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006).
7
 The Sherman Act prohibits a broad scope of conduct which may unreasonably restrain

both foreign and domestic trade.28 Instead of pointing to specific types of conduct, the Court has

announced that the Sherman Act prohibits conduct which falls into the purpose of the laws, so

long as the restraint on trade is unreasonable.29

Certain acts, contracts, or agreements between parties are, on their face, in violation of

the Sherman Act. These acts are deemed to be per se unlawful, because they may have no other

effect than to restrain trade.30 Where an agreement, contract or arrangement between parties is

per se unlawful, the court dispenses with an in depth economic analysis and rules that the

activity is illegal on its face.31 Arrangements where competitors set a common price for a good

or commodity are actions deemed as per se illegal under the Sherman Act.32 A price fixing

agreement that is illegal per se need not be an express agreement on a specific price point.33

Rather, agreements or combinations “. . .formed for the purpose and with the effect of raising,

27
See 15 U.S.C. § (2006).
28
Loewe v. Lawlor, 208 U.S. 274, 293 (1908) (finding that the Sherman Act prohibits any
combination whatsoever that secures action which obstructs the flow of free commerce, or
restricts the ability of a trader to engage in business).
29
Dagher, 547 U.S. at 5 (explaining that the Court does not take a literal approach to the
language “every contract,” but the court interprets the Sherman Act to apply to contracts that
unreasonably restrain trade).
30
Northern Pacific R.R. Co. v. United States, 356 U.S. 1, 5 (1958) (explaining that avoiding
necessity for an overly complicated and prolonged economic investigation, and making the type
of activities that are proscribed by the Sherman Act more clear, requires that certain agreements
or practices be deemed illegal without elaborate inquiry to their precise harm. These activities
include price fixing, division of markets, group boycotts¸ and tying arrangements).
31
See Id.
32
See United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223 (1940); Dagher, 547 U.S. at
5; United States v. Cooperative Theatres of Ohio, Inc., 845 F.2d 1367, 1370 (6th Cir. 1988)
(speaks of cases that are “manifestly anticompetitive”).
33
See Catalano, Inc. v. Target Sales, Inc., 446 U.S. 643, 647 (1980)
8
depressing, fixing, pegging, or stabilizing the price of a commodity. . .” is illegal per se.34 The

method used to fix products for commodities has no effect on its illegality under the Sherman

act.35

Cartels and Anticompetitive Behavior

Cartels by their nature act to facilitate anticompetitive behaviors.36 For this reason,

Cartels are among the most damaging forms of anticompetitive conduct.37 Cartels occur when

two or more entities with significant market power agree to engage in anticompetitive behavior.38

Like an entity which has monopoly power over a certain markets, firms organized in a cartel may

be able to engage in actions such as lowering output so that higher prices may be charged.39

Cartels may exist in instances where there are: (1) a small number of firms in the industry; (2)

the number of potential entrants in the market is limited; and, (3) product is significantly stable

and homogenous.40 The Organization of Petroleum Exporting Countries, more commonly known

as OPEC, is one of the most recognized cartel organizations in the global economy.41

34
Id. (quoting United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223 (1940)) (finding that
an agreement between competitors to extend interest free credit to retailers of beer was, per se
illegal and violated section 1 of the Sherman Act.)
35
Id.
36
See SULLIVAN & GRIMES, supra note 21 at 168.
37
Paul A. Grout & Silvia Sonderegger, The Quest for Cartels, in II ABA SECTION OF ANTITRUST
LAW, ISSUES IN COMPETITION LAW AND POLICY ISSUES IN COMPETITION LAW AND POLICY,
(American Bar Association 2008).
38
Id.
39
See SULLIVAN & GRIMES, supra note 21 at 168.
40
Id. at 169-70 (explaining conditions which may suggest increased gain from, and incentive for,
cartel activities)
41
Andrew C. Udin, Slaying Goliath: The Extraterritorial Application of US Antitrust Law To
OPEC, 50 AM. U. L. REV. 1321, 1328 (2001) (explaining that OPEC members routinely collude
to augment prices by creating inefficient market allocation)
9
 Where actions do not fall into the category of per se illegality, alleged unlawful conduct

is judged under the presumptive “rule of reason” analysis.42 Under rule of reason analysis

antitrust plaintiffs must demonstrate that a contract or arrangement is both unreasonable and

anticompetitive before it will be found unlawful.43

Entities Who May Be in Violation

Section 1 of the Sherman act requires a contract combination or conspiracy between

separate entities.44 Actions that are taken unilaterally by a single entity cannot violate Section 1

of the Sherman act.45 In Copperweld Corp. v. Independence Tube Corp., the Supreme Court

held that agreements between corporations and their fully owned subsidiaries may not be

considered unlawful agreements under § 1.46 Although the Court‟s ruling in Copperweld implied

that §1 of the Sherman Act does not apply unless the conspiring entities are separate legal

characters, scholars have criticized the Court‟s opinion for its lack of guidance on a number of

similar, but more legally complex, fact patterns.47 Lower courts have also acknowledged the lack

of guidance from the Supreme Court in instances where economic and corporate integration are

42
Dagher, 571 U.S. at 5.
43
Id.
44
Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 771 (1984) (finding that
coordinated activity of a parent and its wholly owned subsidiary must be viewed as a single
enterprise and is thus is not an unlawful agreement under Section 1 of the Sherman Act).
45
Id.
46
See Copperweld, 467 U.S. at 773.
47
See Steven Calkins, Professor of Law at Wayne State University, Remarks at the ABA Section
of Antitrust Law Brown Bag Program (Aug. 28, 2002) (edited transcript available online at:
http://www.americanbar.org/content/dam/aba/publishing/antitrust_source/copperweld.authcheck
dam.pdf) (explaining that the court in Copperweld did not provide guidance on similar but more
legally complex relationships).
10
more complex.48 Because the court ruled only on the narrow issue of whether there could be an

“intra-enterprise conspiracy” Copperweld should be taken only to rule that a corporation and its

wholly owned subsidiary may not enter into an agreement in restraint of trade.

Extraterritorial Reach of U.S. Antitrust Law

In order for United States Antitrust Law to actions taken by foreign entities, the United

States must first have personal jurisdiction over the party and subject matter jurisdiction over the

case.49 United States courts may, in antitrust matters, have “. . . personal jurisdiction over any

foreign firm of person as long as it has minimum contacts with the United States and foreign

prohibitions do not restrict service.”50 Moreover, within the statutory language of the Sherman

act there is reference to the statutes being applicable commerce with foreign nations.51 In

American Banana Co. v. United Fruit Co., the court severely restricted the extraterritorial

application of United States antitrust statutes by ruling that the Sherman Act did not apply to

conduct which occurred abroad.52 Later Supreme Court cases overruled American Banana and

held that U.S. antitrust law may be applied to conduct which has an effect on domestic

48
See Fraser v. Major League Soccer, L.L.C., 284 F.3d 47, 56 (1st Cir. 2002) (explaining that
the Supreme Court has never decided how far its ruling in Copperweld applies to more complex
legal and economic arrangements or entites); See also Michael R. Barnett, Editors Note,
Remarks at the ABA Section of Antitrust Law Brown Bag Program, supra at note 48.
49
See EINER ELHAUGE & DAMIEN GERADIN, GLOBAL ANTITRUST LAW AND ECONOMICS 1104
(Foundation Press 2007).
50
EINER ET. AL., supra note 59 at 1104
51
See Id.
52
Id. See American Banana Co. v. United Fruit Co. 213 U.S. 347, 356 (explaining that “. . .the
general and almost universal rule is 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.”)
11
commerce.53 This “effects” jurisdiction or “jurisdiction to prescribe”54 is codified in Section 402

of the Restatement on Foreign Relations.55 Judge Learned Hand in the opinion in United States

v. Aluminum Co. of America implemented a two pronged test to determine whether United States

law would apply to persons or conduct outside of U.S. territory.56 First, Congress must intend to

impose liability for the conduct.57 Second, the conduct must be undertaken with an attempt to

affect, and actually have an effect upon, U.S. territory.58 The Supreme Court has declined to find

jurisdiction to proscribe in cases where there is no clear Congressional intent for statutes to apply

to foreign conduct.59

53
See United States v. Aluminum Co. of America, 148 F.2d 416, 443 (2d Cir. 1945) (finding that
it is settled law that any state may impose liabilities upon persons for conduct outside its borders
that has consequences within its borders).
54
See RALPH G. STEINHARDT, INTERNATIONAL CIVIL LITIGATION: CASES AND MATERIALS ON THE
RISE OF INTERMESTIC LAW 201 (Lexis Nexis 2002). (explaining that an increasingly international
order have come to recognize broad categories of interest to which domestic courts can apply a
nations law to conduct, persons, and things outside of its territory).
55
Id. at 203-04. Professor Steinhardt explains that Sec. 402 of the restatement expresses a
number of factors that should be weighed when determining whether a legislature has
jurisdiction to proscribe conduct which takes place abroad. These factors include: (1)
territoriality; (2) nationality of the actor; (3) nationality of the victim; (4) the right of the country
to protect its own security and strategic interests; and, (5) whether the offense is recognized by
the community of nations as an activity that is of universal concern.
56
See Aluminum Co. of America, 148 F.2d at 443.
57
Id. at 443 (finding that one of the considerations as to determining if the U.S. has jurisdiction
to proscribe is whether Congress intended to impose the liability and whether the Constitution
permits it).
58
Id. (finding that in order for United States antitrust law to apply to conduct which takes place
abroad an act must be intended to affect imports or exports and, must actually affect imports or
exports).
59
See Boureslan & EEOC v. Arabian American Oil Co., 499 U.S. 244, 258 (1991) (finding that
Title VII employment statutes do not apply to conduct which takes place abroad, because
legislation of congress, unless there is clear contrary intent, only applies to conduct which takes
place within the United States) “Congress' awareness of the need to make a clear statement that a
statute applies overseas is amply demonstrated by the numerous occasions on which it has
expressly legislated the extraterritorial application of a statute.”
12
 Congressional intent for the extraterritorial application of U.S. antitrust law was made

clear by Congress in the Foreign Trade Antitrust Improvement Act of 1982 (“FTAIA”).60 The act

requires the alleged anticompetitive conduct to be direct, substantive, and reasonably foreseeable

before antitrust laws may apply extraterritorially.61 The FTAIA excludes from jurisdiction under

the Sherman Act conduct which causes only foreign injury.62 It does so by removing the court‟s

jurisdiction for all conduct involving trade or commerce with foreign nations, and then creates

exceptions where conduct creates a direct foreseeable and substantial effect on in the United

States.63

II. DOMESTIC STATE ACTION IMMUNITY

Federalism concerns caused the Court in Parker v. Brown to opine that United States

antitrust statutes apply to private and not to state action.64 More specifically, the court was

concerned with the ability of antitrust statutes to prohibit state control over domestic activities.

Though the language used in Parker is sweeping,65and seemingly exempts all state action from

antitrust immunity, the Court has invalidated state action which compelled entities to follow a

parallel pricing policy.66 Scholars have attempted to rectify the seemingly contrary holdings of

60
15 U.S.C. §6(a) (2006). See ELHAUGE EL. AL., supra note 59 at 1106.
61
See ELHAUGE EL. AL., supra note 59 at 1106; RESTATEMENT (THIRD) OF FOREIGN RELATIONS
LAW § 415.
62
F. Hoffman-La Roche Ltd. v. Empagran S.A., 542 U.S. 155, 158 (2004).
63
ELHAUGE ET. AL., supra note 59, at 1106-07.
64
Larry L. Teply, Antitrust Immunity of State and Local Government Action, Tulane Law
Review, 48 Tul. L. Rev. 272, 273-74 (explaining that federal state relations was the most
influential factor in Parker). See generally Parker v. Brown, 317 U.S. 341 (1943)
65
Teply, supra note 50 at 273.
66
See e.g. Schwegmann Brothers v. Calvert Distillers Corp., 341 U.S. 384, 389 (finding that a
state sanctioned activity where liquor distributors contracted for a minimum retail price of liquor
violates the spirit of the Sherman Act provision that forbids horizontal price fixing).
13
Parker and later cases by stating that the ruling in Parker granted antitrust immunity to a state

statute that: aimed to solve a problem that was local and was within the traditional exercise of

state police power, the state was at all times in a supervisory role over the statutes

implementation,67 and the state regulation did not clash with national policy objectives.68

Though state and local government action which irresistibly compels market actors to set

prices has, at times, been exempted from the reaches of the Sherman Act,69 there is an argument

that the court‟s inquiry into illegality under the Sherman Act should focus on whether the state

mandated action creates an anticompetitive effect in a particular market.70 The Court has also

acknowledged a hybrid situation where nonmarket governmental mechanisms are used to

enforce private, commercial, decisions.71 In such an instance, governmental regulations which

cause unreasonable restraints on trade are unlawful under the Sherman Act.72 The Court

discusses this hybrid condition and its anticompetitive effects in Parker.

67
Teply, supra note 50, at 285.
68
Id. at 288. Here , Teply proposes that the court in Hecht v. Pro Football, Inc. CASE SITE
intended to limit its ruling in Parker to apply only in cases where a state‟s policy in facilitating
an anticompetitive action was not at odds with national policy.
69
Fisher v. City of Berkeley, CA, 475 U.S. 260, 275 (1986) (finding that a statute which required
a uniform rent ceiling in Berkeley apartments was not by itself in violation of the Sherman Act
because it was a unilateral action, and because states have the ability to reasonably regulate such
activity).
70
Id. (Brennan, J. dissenting) (explaining that under the terms of the Section 1 of the Sherman
Act, he would find a functional “combination” between the governmental entity and the
landlords who facilitated a rent ceiling.
71
See Fisher, 475 U.S. at 267-68 (finding that certain governmental restraints, characterized as
hybrids, merely enforce private marketing decisions, and are not outside of the purview of
Section 1). In Fisher the court found that a municipal government imposed rent control ceiling
was outside of the purview of the Sherman Act because the act was unilateral and was not a
combination, agreement, or contract under the terms of the Act.
72
Id.
14
 III. THE COMITY CONSTRAINT

Though American statutes may proscribe anticompetitive conduct taking place abroad, the

application of United States laws to foreign conduct is still limited by considerations of

international comity.73 Though U.S. courts have yet to expound upon a concrete definition of

international comity74, courts recognize that comity requires the consideration of the interest of

foreign nations.75

Where anticompetitive conduct has taken place abroad, U.S. courts must weigh the effects in

the U.S. against the interests of foreign nations.76 Though the Courts have not provided a

concrete definition of international comity,77 notions of comity are present in several key issues

regarding the extraterritorial application of U.S. antitrust law. These include the force of

73
Id. at 1108.
74
See Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 408 (1964). “This Court has called
„comity‟ in the legal sense „neither a matter of absolute obligation, on the one hand, nor of mere
courtesy and good will, upon the other.”
75
See e.g. Hartford Fire Insur. v. California, 509 U.S. 764, 799 (1993) (finding that notions of
international comity will not be frustrated unless there is a true conflict between foreign and
domestic law); Hong Kong & Shanghai Banking Corp. v. Simon, 153 F.3d 991, 999 (1998)
(finding that international comity did not preclude the court from issuing an injunction against a
Hong Kong bank because there were no contemporaneous proceedings in Hong Kong, and there
was no conflict between Hong Kong and U.S. law on the question at issue); United Intern.
Holdings, Inc. v. Wharf Holdings Ltd., 210 F.3d 1207, 1235 (2000) (finding that the district court
had the authority to issue an order to turn over assets because defendant has not offered evidence
that a foreign sovereign had a legitimate claim to jurisdiction under principles of international
law); Pravin Banker Associates, Ltd. v. Banco Popular Del Peru, 109 F.3d 850, 854 (1997)
(explaining that international comity is the recognition which one nation allows within its
territory the legislative, judicial, or executive acts of another nation).
76
ELHAUGE ET. AL., supra note 59, at 1108.
77
See Sabbatino, 376 U.S. at 408. Comity is “. . .neither a matter of absolute obligation, nor a
mere courtesy and food will.”
15
domestic law as applied to foreign sovereigns;78 the handling of antitrust cases where foreign and

domestic law conflict;79 and, where the court would otherwise be forced to consider the legality

of an official act of a foreign government.80 Courts also assume, when interpreting statute, that

legislators take into account the legitimate sovereign interests of foreign nations.81

Conflicts Between U.S. Antitrust Law and Foreign Law

In Hartford Fire Insurance v. California, the Supreme Court ruled upon whether notions

of international comity would counsel against applying the Sherman Act to the actions of

London based insurers, who sold insurance policies in the U.S.82 Plaintiffs alleged that the

insurers colluded to restrict the terms of commercial general liability insurance, which was

available for purchase in the U.S.83 On appeal, the London insurers argued that the District Court

should have declined to exercise jurisdiction over the case under principles of international

comity.84 In answering the question, the Supreme Court noted that comity analysis in Sherman

Act cases only comes into play after the jurisdictional issue has been settled.85 Jurisdiction in

78
See generally Foreign Sovereign Immunities Act of 1976, 28 U.S.C. §§ 28 U.S.C. 1330, 1332,
1602-11 (1976).
79
See generally Hartford Fire Insur. v. California, 509 U.S. 764 (1993).
80
See Sabbatino, 376 U.S. at 411-12.
81
F. Hoffman-La Roche Ltd. V. Empagran S.A., 542 U.S. 155, 164-65 (finding that in
interpreting congressional intent behind the FTAIA, the court must assume that congress took
into account the legitimate interest of foreign nations). “It thereby helps the potentially
conflicting laws of different nations work together in harmony-a harmony particularly needed in
today‟s highly interdependent commercial world.”
82
See generally, Hartford Fire, 509 U.S. 764.
83
Id. at 771.
84
See. Id. at 778-79.
85
Id. at 797 n.24. In response to Scalia‟s dissent, the Court announced that questions of
international comity only come into play after the jurisdictional issue has been settled. The court
here alludes to a belief that jurisdiction to under the Sherman Act is proper where foreign
16
antitrust actions may be had if the court has concludes that the acts complained of have a

substantial intended effect in the United States.86 The Court then re-characterized the comity

question in terms of international conflicts of law.87 The court stated that the only issue in the

case was whether there was a “true conflict” between British and American law on the subject.88

The Court found that there was no true conflict in the present case because London insurers

could simultaneously comply with American and British insurance law. 89

The Courts ruling in Hartford Fire has been read to specifically exclude considerations of

international comity when applying the Sherman Act to extraterritorial conduct.90 Others have

noted that Hartford Fire rather delays the comity analysis until after a finding of conflict.91

In 2004, the court again discussed the role of international comity in U.S. antitrust law in

F. Hoffmann-La Roche Ltd. v. Empagran S.A.92. Empagran concerned the reach of the Sherman

Act in cases where foreign anticompetitive conduct caused both a foreign and domestic injury.93

In Empagran, defendants sought to dismiss a Sherman Act claim as it pertained to foreign

anticompetitive conduct produces a substantial effect in the United States. This definition of
jurisdiction under the Sherman Act seems to get rid of the notion that jurisdiction to prescribe
and jurisdiction to adjudicate are separate concepts.
86
Id.
87
Id. at 798.
88
Id. at 799.
89
Id. (citing RESTATEMENT (THIRD) FOREIGN RELATIONS LAW § 403, Comment e)
90
See Udin, supra note 42, at 1337 (explaining that, when evaluating whether the Sherman Act
to conduct taking place within foreign nations, the notion of comity is now “defunct” and the
courts only consideration is whether such conduct has had an intended substantial effect on the
U.S.).
91
See Calvin S. Goldman, Chris Hersh, Crystal L. Witterick, Comity After Empagran and Intel,
19 ANTITRUST 6, 7 (2005) (explaining that the court in Hartford Fire adopted a narrow view of
comity that held that comity would not counsel against exercising jurisdiction in absence of a
true conflict).
92
F Hoffman-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004).
93
See Empragran, 542 U.S. at 158.
17
distributors of vitamins, who only sold vitamins outside of the United States.94 The issue in the

case was whether the FTAIA excludes from Sherman Act liability foreign conduct which causes

a foreign effect, in cases where the foreign and domestic effects are entirely independent of each

other.95 In deciding that such foreign anticompetitive conduct is beyond the reach of the Sherman

Act, the Court expounded upon the role of “prescriptive comity” in the extraterritorial application

of U.S. antitrust law.96 The Court explained that principles of prescriptive comity require the

courts to assume that Congress would not have attempted to impose Sherman Act liability on

foreign conduct, which causes an entirely foreign effect.97 The Court‟s use of the term

“prescriptive comity” instead of “international comity,” which was used in Hartford Fire, alludes

to the fact that the Court in Empragran was specifically concerned with Congress‟ ability to

preclude the stated conduct through legislation.98

The Foreign Sovereign Immunities Act

Jurisdictional Immunity for foreign sovereigns has been recognized since the United

States‟ infancy.99 The Supreme Court‟s decision in The Schooner Exchange v. McFadden100 has

been regarded to extend virtually absolute immunity to foreign sovereigns in U.S. courts.101

94
Id. at 159-60.
95
Id. at 165.
96
Id. at 169.
97
Id.
98
Goldman et. al., supra note 92, at 8 (explaining that by the use of the term “prescriptive
comity,” the Court may have been indicating that comity operates to limit the reach of U.S.
Antitrust statutes, and is not merely a doctrine of judicial abstention).
99
Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 434 n.1 (1989) (citing
Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480, 486 (1983))
100
The Schooner Exchange v. McFadden, 11 U.S. 116 (1812).
101
Verlinden, 461 U.S. at 486.
18
Though not constitutional, immunity from foreign states was recognized “. . . as a matter of grace

and comity on the part of the United States.”102 Foreign sovereign immunity historically has

required courts to defer to the decisions of the political branches as to whether to assert

jurisdiction in a suit against friendly sovereigns.103 In 1952, the State Department made clear

through issuing of the “Tate Letter” its intention to confine sovereign immunity only to the

public acts, and not to the commercial acts, of foreign nations.104 The Tate Letter gave birth to

the “restrictive theory” of sovereign immunity105, which was codified into statute by the Foreign

Sovereign Immunity Act of 1976.106

The Foreign Sovereign Immunity Act of 1976 strips the U.S. courts of personal

jurisdiction over foreign states, with certain exceptions as provided in the statute.107 An

exception to the FSIA is the only means by which a foreign state may be sued in a U.S. court. 108

FSIA simultaneously confers both subject matter and personal jurisdiction upon cases when an

exception to the general rule applies.109 Under the FSIA a U.S. court may exercise jurisdiction

over a suit against a foreign state if the foreign state has: (1) waived its immunity explicitly of by

implication; (2) engaged in a commercial activity as described in the FSIA; (3) expropriated

102
Id.
103
Id.
104
Id. at 486-87.
105
Id.
106
Id.
107
See 28 U.S.C. §1604 (2006).
108
Amerada Hess, 488 U.S. at 434. (finding that §1604 and §1330 of the FSIA work together to
express Congress‟ intention that the FSIA be the sole means for obtaining jurisdiction over
foreign sovereigns ).
109
Id. at 435 n.3(explaining that § 1330 of the FSIA provides that personal jurisdiction over a
foreign state claim shall exist wherever the district court may have subject matter jurisdiction and
service of process has been made according to the Act).
19
property in violation of international law; (4) acquired rights to United States property; or, (5)

has committed certain torts within the United States.110

The commercial activities exception of the FSIA is codified in 28 U.S.C. § 1602(a)(2).

The exception applies where “. . . the action is based upon a commercial activity carried on in the

United States by the foreign state; or upon an act performed in the United States in connection

with a commercial activity of the foreign state elsewhere; or upon an act outside the territory of

the United States in connection with a commercial activity. . .” elsewhere.111 For jurisdiction to

apply to an action taking place abroad under the commercial activity exception, the action must

have a direct effect in the United States.112

The commercial activity exception to FSIA applies when a state‟s actions are, by their

nature, commercial.113 In determining whether a state‟s actions are commercial and thus subject

to an exception under the FSIA, the statute requires courts to analyze the nature rather than the

purpose of the activity.114 The term “commercial” in the manner that is used in the FSIA is a

term of art first used to describe an exception to the restrictive theory of sovereign immunity.115

The term has been applied to a state‟s activities that arise out of a purely commercial transaction,

or when the state acts in the manner of a corporation.116 When a foreign government acts not as

a regulator of a market but in the manner of a private player within a market the state‟s actions

110
Id. at 439. See ELAHAUGE ET. AL., supra at note 59, at 1160.
111
28 U.S.C. 1602(a)(2); Republic of Argentina v. Weltover, 504 U.S. 607, 611 (1992).
112
See Weltover, 504 U.S. at 612.
113
Id.
114
Id. (citing 28 U.S.C. § 1603(d)).
115
Id. at 612-13.
116
Id. at 613 (finding that the Court‟s decision in Alfred Dunhill of London, Inc. v. Republic of
Cuba, 425 U.S. 682 (1976) applied the commercial activities exception when the state acts in the
manner of a private citizen or a corporation, sheds light upon congressional intention behind the
exception).
20
are deemed commercial within the meaning of the FSIA.117 Regulatory activities such as

licensing and exploitation of natural resources have been found to be a sovereign activity thus

subject to jurisdictional immunity.118

Jurisdiction under the commercial activity exception to FSIA is granted only where the

activity complained of has a direct effect upon the United States.119 A direct effect may be found

where a sovereign engages in anticompetitive conduct in the trade of a commodity, and directly

exports that commodity to the United States.120 The manner in which the states actions are

characterized may also play a role in whether they are deemed to be a commercial activity. 121

117
Id. at 614 -15 (finding that the Argentinean government‟s issuance of debt collection
instruments was commercial because the debt instruments were “garden variety,” they may be
held by private parties, they are negotiable and may be traded o the international market, and
they promise a future stream of cash income). In Weltover the court explained that the term
“commercial,” as used in the restrictive theory of sovereign refers to actions which exercise
powers that may only be exercised by a private citizen.
118
See MOL Inc. v. People’s Republic of Bangledesh, 736 F.2d 1326, 1328 (9th Cir. 1984)
(finding that the exportation of monkeys by Bangladesh was a sovereign activity).
119
See Weltover, 504 U.S. at 618; California v. NRG Energy, 391 F.3d 1011, 1024 (9th Cir.
2004) (finding that alleged anticompetitive credit decisions did not have a direct effect upon the
United States because the decisions only affected an intermediary power distributor whose
independent decisions in turn affected the United States) See also Texas Trading & Milling Corp
v. Federal Republic of Nigeria, 647 F.2d 300, 310 (2d Cir. 1981). The court in NRG Energy
found that there was no evidence that the anticompetitive actor executed the day to day control
over an the intermediate power distributor who sold power directly to the United States.
120
See NRG Energy, 391 F.3d at 1025. Here the court analyzes whether NRG Energy an “agency
or instrumentality” of Canada directly sold power to the State of California. Because NRG sold
power to PowerEx a private firm who then made decisions on how to distribute power to U.S.
locations, the court found that the decisions of NRG Energy did not have a “direct effect” upon
the U.S.
121
See Rong v. Liaoning Province Government, 452 F.3d 883, 889-90 (D.C. Cir 2006) (finding
that a “Working Committee‟s” takeover of a private foundation seems like a commercial activity,
but the act flowed from a “state assets” declaration, an act that can only be taken by a sovereign);
STEINHARDT, supra note 64, at 431 (asking whether the courts determination in Weltover and
Saudi Arabia v. Nelson, 507 U.S. 349, 357 (1993), were due to “unbounded” judicial
characterization.
21
 To fall within the commercial activities exception to the FSIA a states conduct leading to

a suit must be “based upon” acts performed in connection with commercial activity.122 The

Supreme Court in Saudi Arabia v. Nelson, ruled upon whether Nelson‟s suit against the Saudi

Arabian government for several torts were based upon a commercial activity, and thus subject to

the commercial activities exception.123 The court found that while commercial activities led to

the conduct which eventually injured Nelson, the tortuous conduct itself formed the basis of the

suit.124 The court then found that the torts complained of did not fall within the commercial

activities exception to the FSIA and jurisdiction could not be had.125 In its ruling, the Court

provided guidance regarding the meaning of the words “based upon.”126 The Court stated that the

“based upon” phrase contained in SEC 1605(a)(2) is read to mean those elements that if proved

would entitle a plaintiff to relief under his theory of the case.127 Where there is an attenuated

connection between the actions which form the basis for the suit, and the commercial activity,

the Court may not have jurisdiction under the FSIA.128

The manner in which the states actions are characterized may also play a role in whether

they are deemed to be a commercial activity.129 In MOL, Inc. v. Bangladesh, the Ninth Circuit

122
Saudi Arabia v. Nelson 507 U.S. 349, 357 (1993)
123
See Id. at 358
124
See Id.
125
See Id. at 363.
126
Globe Nuclear Services and Supply v. AO Techsnabexport, 376 F.3d 282, 286 (4th Cir 2004)
127
Id.
128
See Nelson, 507 U.S. at 362-63 (finding that the basis of the suit was tortuous conduct, and
though the government‟s action were related to employment, they were not commercial in
nature).
129
See MOL, 736 F.2d at 1328-29. Plaintiffs in MOL argued that the lawsuit was based upon a
breach of contract, which was a purely commercial activity. The government of Bangladesh
argued that the activity was not based upon the breach of contract, but was based upon licensing
of a natural resource (monkeys) which is a sovereign activity. The court agreed with Bangladesh.
See also STEINHARDT, supra note 64, at 431 (brining up the issue of characterization of
commercial/sovereign activity).
22
opined that the FSIA granted sovereign immunity to Bangladesh from a suit involving a contract

for the sale of monkeys. In determining that the commercial activities exception did not apply,

the court characterized a contract for sale of monkeys as a sovereign activity, because the

monkeys were considered natural resources, and granting a license to exploit natural resources is

a sovereign activity.130

Applicability of the FSIA to Agencies and Instrumentalities

In addition to the FSIA applying to foreign states in their official capacity, Congress also

made the FSIA applicable to the “agency or instrumentality of a foreign state.”131 Congress‟

addition of the agencies and instrumentalities of foreign states into the terms of the FSIA makes

the statute applicable to corporations and other state-owned entities.132 The FSIA itself provides

that a corporation is considered an agency or instrumentality of a foreign state when a majority

of the corporation is owned by the state or when the entity is an organ of another state.133 There

are several factors used in a determination of whether an entity is an organ of a foreign

130
Id. at 1329.
131
See 28 U.S.C. 1603(b). This section states that the term “foreign state” as used in the FSIA
apples to an agency or instrumentality of a foreign state (1) which is a separate legal entity,
corporate or otherwise, and (2) which is an organ of another state, or a majority of whose shares
of other ownership interest is owned by a foreign state, and (3) which is neither a citizen of a
State of the United States.
132
See e.g. Globe Nuclear Services and Supply v. AO Techsnabexport, 376 F.3d 282, 285 (4th Cir
2004) (finding that Tenex is wholly owned by the Russian Federation, thus subject matter
immunity over Tenex may only be had pursuant to one of the exceptions of the FSIA); Filler v.
Hanvit Bank, 378 F.3d 213, 217 (2nd Cir. 2004) (finding that Hanvi Bank is an “agency or
instrumentality” of a foreign state in terms of the FSIA because it was formed by Korean statute
and presidential decree, it performs functions traditionally performed by the government, and
many of its operations are overseen by the Korean Ministry of Finance).
133
See 28 U.S.C. 1603(b)(2).
23
government.134 These include whether the entity was created for a national purpose, whether it

closely supervised by the foreign government, whether the government is in charge of

employment and salaries, whether the entity holds exclusive rights in the foreign country, and the

legal relationship between the entity and the foreign government.135 Corporations which are

wholly owned by the state government are more than likely to be considered an agency or

instrumentality under the FSIA.136 State-owned corporations is participating in a commercial

activity, or in the commercial marketplace, will be subject to U.S. Antitrust Law137

Foreign Sovereign Compulsion

A defense to an assertion to jurisdiction under the FSIA exists where a foreign entity is

required to engage in the disputed conduct by the laws of a sovereign nation.138 Two possible

rationales for the defense include notions of comity between sovereign states, and providing a

measure of predictability for those who seek to conform their conduct with applicable laws.139 In

Interamerican Refining Corp. v. Texaco Maracaibo, Inc. 307 F. Supp. 1291 (D. Del. 1970) the

134
See Filler v. Hanvit Bank, 378 F.3d 213, 217(2004) (explaining the relevant factors used to
determine whether an entity is an organ of a state under the FSIA).
135
Id.
136
See e.g. Globe Nuclear Services, 376 F.3d at 215 (finding that Tenex, a company wholly
owned by the Russian Federation is considered an instrumentality under FSIA); NRG Energy,
391 F.3d at 1026 (finding that PowerEx is not an instrumentality of the Canadian government
because it is not wholly owned by the Canadian government, is not financially supported by the
Canadian government, and maintains a high degree of autonomy).
137
ELHAUGE ET. AL., supra note 59, at 1160 (explaining that as a practical matter most activities
of foreign government owned corporations operating in the commercial marketplace will be
subject to U.S. antitrust laws to the same extent as the activities of foreign privately owned
firms).
138
See Id. at 1161 (explaining that at least one court and some executive agencies have
recognized a defense under U.S. antitrust law when defendant was ordered or required by law to
take a certain anticompetitive action).
139
Id.
24
court found that Texaco Maracaibo, a Venezuelan company, was held not to be subject to U.S.

antitrust liability for anticompetitive conduct, because the company was required by law to

participate in such conduct.140 Such a situation was contemplated much later in Hartford Fire.141

In Hartford Fire the court discussed the possibility of a true conflict between U.S. antitrust law

and the law of a foreign sovereign. Where an entity is compelled by a sovereign to engage in

anticompetitive conduct, a defense of foreign sovereign compulsion is a defense to jurisdiction

under the FSIA, and is not an embodiment of the similar, comity based, act of state doctrine.142

Act of State Doctrine

The act of state doctrine is a rule of judicial abstention from ruling in cases where U.S.

courts will be forced to rule upon the legality of the acts of a sovereign government done in its

own territory.143 The doctrine represents an exception from the general rule that a court, where

jurisdictional standards are met, will decide a case based upon various standards of law.144 Like

140
See Interamerican Refining Corp. v. Texaco Maracaibo Inc. 307 F. Supp 1291, 1298-99 (D.
Del. 1970) (finding that the defense of foreign sovereign compulsion is available so that
corporations doing business in another country would not have to chose whether to do business
with the United States, or with the country in which they operate). See ELHAUGE ET. AL., supra
note 59, at 1160 (explaining that such a defense may be recognized in circumstances where there
is a direct conflict between U.S. antitrust law, and the law of a foreign sovereign).
141
See Hartford Fire, 509 U.S. at 765. The court in Hartford Fire found that the only question at
issue was whether British law governing insurers was in true conflict with U.S. antitrust law.
Because the court found that there was not a true conflict its inquiry ended there. It would seem
that if there was a true conflict, the court would refuse to adjudicate the matter based upon the
act of state doctrine. However scholars have stated that the defense of foreign sovereign
compulsion is a defense against jurisdiction under the FSIA and not upon adjudication.
142
ELHAUGE ET. AL., supra note 59, at 1160 N 93.
143
See First National City Bank v. Banco Nacional de Cuba, 406 U.S. 759, 763 (1972)
144
Id.
25
sovereign immunity, the act of state doctrine is meant to further comity among nations.145 The

doctrine acts as an escape device where there is no treaty or other international agreement

controlling on the issue at hand.146 The doctrine is federalism based,147 and its continued use is

based upon its ability to reflect the proper balance between the three branches.148 In applying the

act of state doctrine, the courts provide a level of deference to the power of the Executive

Branch, and to the Senate over matters involving foreign nations.149 Pursuant to such deference,

domestic courts weigh policy recommendations from executive agencies on whether the

application of the doctrine will further foreign policy objectives.150

The act of state doctrine is not an absolute rule, and the court has entertained exceptions

where domestic separation of power interests and foreign policy interests will not be served.151

Some argue that the act of state doctrine is not an exception for controversies that may embarrass

foreign nations; rather, the doctrine seems to simply validate purely governmental actions taken

within sovereign territory.152

145
Id.
146
See RESTATEMENT (THIRD) OF FOREIGN POLICY § 443; STEINHARDT, supra note at 507-08
(quoting Sabbatino, 376 U.S. 398 ).
147
Elhauge et. al, supra note 59, at 1162.
148
First Nat. City Bank, 406 U.S. at 763.
149
Id. at 765.
150
See Id. at 767-68 (explaining that the Department of State issued a letter stating that when the
Executive Branch decides that the act of state doctrine need not be applied for foreign policy
reasons, the court should commence in its determination of the legal issues in the case just as it
would with any issue); Banco Nacional de Cuba, 376 U.S. at 407 (explaining that the Court of
Appeals, in their decision, relied on two letters written by the State Department, which it took as
evidence that the Executive Branch had no objection to the court‟s ruling upon the issue at hand).
151
W.S. Kirkpatrick & Co. v. Environmental Tectonics, 493 U.S. 400, 404-05 (1990) (explaining
that Supreme Court Justices have suggested possible exceptions in cases where the act of state is
a commercial transaction, or when the executive does not object to the court ruling upon the
validity of the foreign action).
152
See Udin, supra note 42 at 1357. Udin argues that the act of state doctrine should not prevent
the application of United States antitrust law to the actions of OPEC. Udin bases his argument on
26
 The Supreme Court has ruled that where an entity retains commercial, but not

governmental authority to participate in certain conduct, the act of state doctrine need not be

applied.153 Such a disqualification of the act of state doctrine has been noted where a government

becomes partnered with companies involved in trade.154 In Alfred Dunhill of London, Inc. v.

Republic of Cuba155 the Court ruled upon whether the act of state doctrine should be applied

where Cuban state acquired cigar companies were being sued by their former owners.156 The

court found that the state takeover of cigar companies, and failure to repay funds, was not an act

of state, because there was no evidence that such conduct was a public act.157 In dicta, the court

expressed agreement with an argument that the act of state doctrine should not be extended to

purely commercial obligations.158

IV. THE SHERMAN ACT AND CHINESE RARE EARTH METAL EXPORTERS

Two federal agencies, the Department of Justice (“DOJ”), and the Federal Trade Commission

(“FTC”) may bring antitrust actions against foreign entities on behalf of the United States.159

Both agencies publish guidelines on the administration of such cases.160 The guidelines are

intended to provide a measure of guidance to businesses who engage in international operations

the “undeniably commercial” character of OPEC‟s price fixing activities, and the fact that a
comity analysis, upon which the act of state doctrine is based, is defunct after Hartford Fire.
153
Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682, 693-94 (1976).
154
See Id. at 695-96 (quoting Bank of the United States v. Planters’ Bank of Georgia, 22 U.S.
904, 907 (1824)).
155
Id.
156
Id.
157
Id. at 694-95.
158
Id.
159
See U.S. DEPARTMENT OF JUSTICE, FEDERAL TRADE COMMISSION, ANTITRUST ENFORCEMENT
GUIDELINES FOR INTERNATIONAL OPERATIONS (1995), [hereinafter DOJ/FTC
Guidelines}available online at: http://www.justice.gov/atr/public/guidelines/internat.htm.
160
Id.
27
on issues of subject matter jurisdiction, and when the United States would choose to enforce such

jurisdiction.161 The DOJ may seek criminal sanctions for violation of certain antitrust laws, and

the FTC seeks civil penalties and injunctive relief subject to the Federal Trade Act. 162

Though the Federal Government may bring antitrust suits, an estimated 90% or more of suits

in antitrust cases are brought in private enforcement actions.163 Because the executive branch

conducts foreign policy on behalf of the United States,164 its enforcement agencies thoroughly

weigh comity interest before acting.165 Arguments have been made that private enforcement is

more effective in furthering the goals of antitrust law than enforcement by the federal

agencies.166

The Jurisdiction Hurdle

Regardless of whether a case for anticompetitive practices against the Chinese

government is brought by public or private plaintiffs, the court‟s inquiry will begin with a

161
Id.
162
Id. Though the court explained that it was persuaded by the argument that the act of state
doctrine does not apply to commercial conduct, the court only ruled on the narrow issue of
whether the Cuban government‟s takeover of cigar exporters was a public act to which the act of
state doctrine should apply.
163
See American Antitrust Institute, Introduction: Manifesto for Competition, in THE NEXT
ANTITRUST AGENDA: THE AMERICAN ANTITRUST INSTITUTE‟S TRANSITION REPORT ON
COMPETITION POLICY TO THE 44TH PRESIDENT 16 (Albert A. Foer ed., Vandeplas Publishing
2008).
164
See First Nat. City Bank., 406 U.S. at 767-68.
165
See DOJ/FTC Guidelines, supra note 153 at § 3.2. According to the guidelines, the agencies
take into consideration a number of comity factors beyond whether there is a conflict of law. The
agencies seem to perform a more substantial comity analysis than is required in Hartford Fire.
166
See Albert Foer, President American Antitrust Institute, Panelist Remarks, Trends in Cartel
Regulation, 2010 Asian Competition Association Annual Conference (Sep. 16, 2010), available
online at: http://www.antitrustinstitute.org/content/foer-speaks-about-cartels-asian-competition-
association-annual-conference.
28
determination of whether the court has jurisdiction to hear the case. As the sole manner in

gaining jurisdiction over the Chinese government, one of the exceptions to the FSIA must apply

before subject matter jurisdiction may be had.167 The most likely argument for obtaining

jurisdiction would be that the Chinese government in setting export quotas, and fixing prices for

rare earth commodities are participating in commercial activities, and thus the commercial

activity exception to the FSIA should apply. This argument is likely to rest upon the fact that the

exporting of goods into the stream of commerce is commercial in nature. Taken alone, such an

argument is weak and is not likely to overcome the presumption of immunity under the FSIA.

An action against the Chinese government is likely to be found to be based upon the issuance of

quota rules itself, and not Chinese commercial conduct in the import export market.168 First, it

has been established both in the restrictive theory of sovereign immunity, and statutory immunity

under the FSIA, that the commercial activities exception does not apply to conduct undertaken

by a state in a regulatory capacity.169 China as a sovereign nation retains the ability to regulate

the export of its natural resources, including rare earth commodities.170 Moreover in setting

quotas, through the Chinese Ministry of Commerce for the export of rare earths China is taking

actions which by their nature can only be undertaken by a sovereign government.171

China‟s position as a regulator is complicated because by owning a significant stake in

the mining corporations themselves, China also acts as a participant in the mining industry.172

Though China‟s underlying purpose behind reducing export of such goods may be to take

167
See Amarada Hess, 488 U.S. at 434.
168
See Rong 452 F.3d at 889-90 (finding that an alleged anticompetitive action of a Chinese
provincial government was based upon a “state assets declaration” that may only made by a
sovereign).
169
See supra discussion of Weltover accompanying notes 113-18.
170
See MOL, Inc., 736 F.2d at 1329.
171
See Id.
172
See China Pressing Ahead with Rare Earth Industry Reform, supra note 17.
29
advantage of their near monopoly in the rare earth market, courts will only look into the nature of

the conduct, which under this argument is almost purely governmental.173

A stronger argument may be proffered by filing suit against the state-owned mining

corporations for violating § 1 of the Sherman Act by entering into anticompetitive supply

agreements, and alleged price fixing arrangements174 with each other and the Chinese

government. This restructuring of the argument requires a slightly different jurisdictional

analysis. First, as fully or majority owned subsidiaries of the Chinese Government, the state-

owned mining companies are likely to be considered “agencies or instrumentalities” of the

Chinese Government.175 As such, jurisdiction over the companies in U.S. courts is subject to the

FSIA.176 However, unlike the Chinese Ministry of Commerce, the actions of the corporations in

mining and exporting metals is arguably commercial. The companies perform actions all of

which may be performed by a private actor in the market. Like in Weltover, this activity may be

characterized as purely commercial.177

State-owned mining companies will likely attempt to escape jurisdiction under the FSIA

by arguing that they are compelled to participate in anticompetitive conduct by the Chinese

government. A similar argument has been used to argue for domestic state action immunity in

cases where a state government has compelled a certain action.178 Such an argument, however,

will work to undermine Congress‟ intentions behind the commercial activities exception. The

FSIA provides a clearly written exception from foreign sovereign immunity where the state acts

173
See generally MOL, Inc., 736 F.2d 1326.
174
See Zhao Yan, supra note 12. Price fixing arrangement has yet to be imposed as of the date
of this article. The article discusses plans which are underway to impose a uniform pricing
mechanism.
175
See supra text accompanying note 136.
176
See supra discussion of jurisdiction under FSIA.
177
See supra discussion of Weltover, 504 U.S. 107.
178
See supra discussion of foreign sovereign compulsion.
30
in a commercial capacity. The State Department in the Tate Letter emphasized that adjudications

upon commercial activities do not impede upon sovereign interests and are thus consistent with

international law.179 The commercial activities exception to FSIA codified in statute the State

Department‟s interpretation.180

In the case of alleged Chinese export cartels, allowing state-owned mining companies to

invoke sovereign immunity will expose a huge loophole in the United States‟ sovereign

immunity framework. If such an argument is accepted, the Chinese government may act in a

purely commercial manner, and receive public immunity by simply stating that they were

compelled to do so by their alter ego the PRC Government.181 A similar situation was anticipated

in Fisher, where the court discussed a hybrid situation where noncommercial governmental

mechanisms are used to enforce private commercial decisions.182 In Fisher, the government

stated that in such a circumstance, domestic state immunity may not apply. Though Fisher was a

discussion of the federalism based domestic state action immunity, a parallel may be drawn to

the current facts. Assertion of subject matter jurisdiction under these circumstances will not

frustrate the purpose of the FSIA especially when comity interest may be considered after

jurisdiction to hear the case has been granted.

179
See Alfred Dunhill, 425 U.S. at 698 (quoting a State Department letter explaining the
Departments position on private and commercial activities of foreign states).
180
See Weltover, 504 U.S. at 614.
181
See Andrew Longstreth, U.S. courts confront China’s involvement in price fixing, WESTLAW
NEWS & INSIGHT, Mar. 11, 2011, available online at:
http://westlawnews.thomson.com/National_Litigation/News/2011/03_-
_March/U_S__courts_confront_China_s_involvement_in_price_fixing/. A similar position is
taken by Chinese vitamin companies who have been sued in U.S. courts for their participation in
price fixing activities.
182
See Fisher, 475 U.S. at 267-68.
31
 Hartford Fire disposed of comity analysis at the jurisdictional stage.183 For this reason,

once finding that jurisdiction exists under FSIA and that the alleged conduct has a direct,

substantial, and reasonably foreseeable under the FTAIA, courts will hear the case on its

merits.184 Because the United States imports more than 90%, of its rare earth metals directly

from China,185any artificial strain on supply will have a direct effect on U.S. firm‟s ability to

manufacture goods which require rare earth components. A restraint will also effect prices to

consumers on goods which require, or contain, such components.186 Such an effect is arguably

foreseeable by Chinese firms because China has previous flexed its market power in rare earth

metals to achieve certain policy objectives.187 Simply put, China knows the power of its bite.

Under the framework of Hartford Fire, the courts will be required to determine if there is

a true conflict between U.S. and Chinese Law.188 The Chinese will likely argue a true conflict

due to the inability of Chinese mining firms to both follow the directives of the Chinese Ministry

of Commerce, and U.S. Antitrust Law.189 Some argue that unless there are clear directions from

Congress to follow when facing such a conflict, the smooth functioning of international systems

of comity should be a primary consideration.190 It may seem as though international comity

would call for the ability of the Chinese to govern the output of exports as it pleases, however, an

183
See Udin, supra note 42, at 1346.
184
See Hartford Fire 509 U.S. at 796 n.23; Udin, supra, note 42, at 1364 ( applying the modified
2 part test in Hartford Fire to OPEC activities).
185
USGS Rare Earth Fact Sheet, supra note 1, at 1.
186
See Lefebvre, supra note 15.
187
See Luft et. al., supra note 16.
188
See discussion of Hartford Fire and conflict, supra.
189
Id. Unlike in Hartford Fire, here Chinese mining companies are likely not able to follow the
laws of both nations.
190
GARY J. SIMPSON, ISSUES AND PERSPECTIVES IN CONFLICTS OF LAWS 313 (4th ed., Carolina
Academic Press 2005) (citing Elliot E. Cheatham & Willis L.M. Reese, Choice of the Applicable
Law, 52 Colum. L. Rev. 959, 962-63 (1952)).
32
analysis of relevant principles in international antitrust law will show that there is no true

conflict.

In 2008 Chinese adopted a comprehensive Antitrust Law.191 Like U.S. law, the Chinese

antitrust framework outlaws abuses of market power including, predatory pricing, refusals to

deal, exclusive dealing, tying, and price discrimination.192 The Chinese law also provides for

extraterritorial application where actions have an effect on the domestic Chinese markets. 193 The

implementation of the law demonstrates that the Chinese government is aware of the harm that

comes from anticompetitive cartel-like activity. For this reason, an argument may be made that

the laws of the United States and the laws of China seem to be on the same page. Such an

argument would suggest that there is not a true conflict between the laws of the United States

and China, and that U.S. law may be applied without frustrating Chinese sovereign integrity.

Even if there is a true conflict, application of U.S. antitrust law will not disrupt notions of

international comity. There is a growing international consensus, and international cooperation in

reducing the harm cause by anticompetitive conduct, including cartels.194 The growing consensus

has led to a convergence in competition enforcement policies.195 Moreover the convergence of

policy is facilitated by international organizations such as the Organization for Economic

Cooperation and Development (“OECD”), the World Trade Organization (“WTO”), and the

191
FRESHFIELDS, BRUCKHAUS DERRINGER, CHINA FINALLY ENACTS ANTI-MONOPOLY LAW 1
(Freshfields Bruckhaus Derringer 2007), available online at:
http://www.freshfields.com/publications/pdfs/2007/sept05/19887.pdf.
192
Id. at 7.
193
See id. at 1. Though such activity is outlawed, the Chinese framework leaves room for
reasonable exceptions.
194
JEFFERY L. KESSLER & SPENSER WEBER WALLER, INTERNATIONAL TRADE AND U.S.
ANTITRUST LAW 228 (2d ed., Thompson West 2006).
195
Id.
33
United Nations Conference on Trade and Development (“UNCTAD”) 196. All of these

organizations have multiple international members and have internal organs that are dedicated to

dampening the impact of anticompetitive behavior in the global economy197 China itself joined

the World Trade Organization in 2001.198 The international community recognizes the harm that

is caused by cartel activities. Nations who engage in such activity should be aware that such

activity, if it has an effect on another nation, may be held liable for their actions.199

The Act of State Doctrine Should Not Apply to Actions by Chinese State-owned Mining

Companies

When determining whether or not the act of state doctrine applies to Chinese rare earth

metal exporters, it is important to consider the unique economic relationship between China and

the United States.200 China is a major U.S. trading partner.201 The importance of the relationship

between China and the United States was emphasized during a state visit by Chinese President

196
See id. at 232; Mark R. Joelson, AN INTERNATIONAL ANTITRUST PRIMER: A GUIDE TO THE
OPERATION OF UNITED STATES, EUROPEAN UNION AND OTHER KEY COMPETITION LAWS IN THE
GLOBAL ECONOMY 393-97 (2d ed., Kluwer Law International, 2001)
197
See KESSLER, et. al at 232 (explaining that the OECD has established a cartel working group
and has issued numerous reports regarding cartels); JOELSON at 395, 398 (explaining that the
United Nations Conference on Trade and Development publishes a “Model Law” document
which aids nations in drafting and refining competition laws). Joelson also discusses the role of
the WTO dispute settlement procedure where nations can arbitrate competition issues in the
WTO framework, and the WTO Working Group on the Interaction between Trade and
Competition Policy which considers issues relating to anticompetitive practices.
198
See WORLD TRADE ORGANIZATION, ANNUAL REPORT 2002 2 (World Trade Organization
2002).
199
See Foer, supra note 162.
200
See Barack Obama, President of the United States, Press Conference With President Obama
and President Hu of the People‟s Republic of China (Jan. 19, 2011), available online at:
http://www.whitehouse.gov/the-press-office/2011/01/19/press-conference-president-obama-and-
president-hu-peoples-republic-china.
201
Id.
34
Hu Jintao in January of 2011.202 Though the economies of the United States and China are

closely tied, our relationship with China should not encourage the act of state doctrine to apply to

Chinese anticompetitive activity.

In the present case, the application of the act of state doctrine to a suit brought against

Chinese rare earth metal exporters, will frustrate congressional intent behind FSIA, disrupt

notions of federalism, and undermine the rule of law. U.S. courts have noted that the act of state

doctrine is not required by a respect for sovereign authority and is inconsistently applied.203 In

invoking the act of state doctrine, courts should consider whether congress has specifically

invoked jurisdiction over particular state conduct.204 Congress, in the FSIA has clearly conferred

jurisdiction over the commercial conduct of foreign sovereigns, and their entities.205 Congress

has also clearly stated that such jurisdiction be applied to anticompetitive conduct which has an

effect upon the United States.206 To not apply the Sherman Act to conduct of Chinese metal

exporters will totally ignore the desires of congress in a display of political favoritism. As it is

often repeated, it is the duty of the judicial branch to “say what the law is.”207 In the present case

the law is clear that notions of international comity do not counsel against jurisdiction over a

sovereign‟s commercial conduct.208 Though the act of state doctrine is a rule of judicial

202
Id.
203
See Republic of the Philippines v. Ferdinand E. Marcos, 862 F.2d 1355, 1360 (9th Cir. 1988)
(citing Sabbatino, 376 U.S. at 421-22).
204
See Alfred Dunhill, 425 U.S. at 698. In Alfred Dunhill the court opined that invoking the act
of state doctrine would work to frustrate the purpose of the FSIA, where congress has explicitly
conferred jurisdiction over the commercial conduct of foreign sovereigns.
205
See Weltover at 612-13.
206
See FTAIA, supra note 70.
207
Mauberry v. Madison, 5 U.S. 137, 177 (1803)
208
See Hartford Fire, 509 U.S. at 798.
35
abstention and not a jurisdictional bar, Congress is deemed to have considered notions of comity

when enacting laws that effect foreign sovereigns.209

The Executive Branch in its role as executor of U.S. law may choose to enforce antitrust

laws at it sees fit.210 It does so by considering whether or not to bring forth an antitrust case

through the Department of Justice or the Federal Trade Commission, 211 or by filing a formal

complaint with the World Trade Organization. Applying the act of state doctrine, in a suit against

Chinese rare earth exporters will bar private litigant‟s ability to bring forth a suit for

anticompetitive activity. It has been argued that private enforcement is a better tool against

anticompetitive conduct than public action.212

Allowing the act of state doctrine to apply in the instant case will demonstrate to China

that, because they are a close trading partner, they are above the law. Such a message would

resonate even more clearly when the law in question is considered of the utmost importance to

our system of economic liberty.213

V. CONCLUSION

Artificial restrictions of supply and price fixing in rare earth metal exports expose the United

States to the exact conduct that the Sherman Act was designed to prevent. For this reason the

209
See Empragran, 542 U.S. at 164. The Court in Empragran states that the courts must assume
that Congress seeks to follow customary rules of international law, including those contained in
the RESTATEMENT (THIRD) OF FOREIGN RELATIONS LAW § 403.
210
See generally DOJ/FTC Guidelines, supra note 155.
211
Id.
212
See Foer, supra note 162, at 3.
213
See Glen Holly Entertainment, 343 F.3d at 1014-15. Speaks of antitrust law as the “Magna
Carta” of free enterprise.
36
Sherman Act should, and arguably does apply to such activity, regardless of where the conduct

takes place, and whether the alleged violators are state-owned.

The United States should demonstrate the importance of the Sherman Act by bringing a

suit on behalf of the country to curb such activity. U.S. courts should also be available to private

litigants to bring a suit against rare earth miners who engage in price fixing and artificial

restrictions of supply. Though the United States may choose to address such activity through

diplomatic means, including WTO action, law suits should not be of the picture. The growing

international consensus of the harm caused by anticompetitive conduct, specifically cartels, will

lend support to government enforcement activities and dissuade application of the act of state

doctrine. The United States has the ability to send a strong message that though China is our

friend, friends don‟t let friends participate in anticompetitive activity.

37