UNITED STATES OF AMERICA,,
LSL BIOTECHNOLOGIES, INC., SEMINIS VEGETABLE SEEDS, INC., AND LSL PLANTSCIENCE LLC,
AND SUGGESTION FOR REHEARING EN BANC
TABLE OF CONTENTS
Blue Shield of Virginia v. McCready, 457 U.S. 465 (1982)
F. Hoffman-LaRoche Ltd. v. Empagran S.A., 124 S. Ct. 2359 (2004)
FTC v. PPG Industries, Inc., 798 F.2d 1500 (D.C. Cir. 1986)
Green v. Bock Laundry Mach. Co., 490 U.S. 504 (1989)
Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993)
In re Ins. Antitrust Litig., 938 F.2d 919 (9th Cir. 1991), aff'd in part, rev'd in part, 509 U.S. 764 (1993)
Keene Corp. v. United States, 508 U.S. 200 (1993)
Matheson v. Progressive Speciality Ins. Co., 319 F.3d 1089 (9th Cir. 2003)
McGlinchy v. Shell Chem. Co., 845 F.2d 802 (9th Cir. 1988)
Nat'l R.R. Passenger Corp. v. Boston & Maine Corp., 503 U.S. 407 (1992)
N. Pac. Ry. Co. v. United States, 356 U.S. 1 (1958)
R.C. Dick Geothermal Corp. v. Thermogenics, Inc., 890 F.2d 139 (9th Cir. 1989)
Republic of Argentina v. Weltover, Inc., 504 U.S. 607 (1992)
United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir.) (en banc), cert. denied, 534 U.S. 952 (2001)
United States v. Nippon Paper Indus. Co., 109 F.3d 1 (1st Cir. 1997)
United States v. Texas, 507 U.S. 529 (1993)
United States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003)
15 U.S.C. 1 3
15 U.S.C. 6a(1) 1, 4
28 U.S.C. 1605(a)(2) 14
Fed. R. App. P. 28(j) 10
Fed. R. App. P. 35(a) 1
Fed. R. Civ. P. 12(b)(1) 5, 12
Fed. R. Civ. P. 12(b)(6) 4, 7
Fed. R. Civ. P. 12(h)(3) 10
9th Cir. R. 35-1 2
Webster's Third New International Dictionary 640 (1981) 15
This case raises an important issue of first impression: Whether the Foreign Trade Antitrust Improvements Act ("FTAIA") of 1982, 15 U.S.C. 6a(1), incorporates a test for application of the Sherman Act to foreign conduct that fundamentally differs from the established common law test. In a divided decision, the panel majority held that the common law understanding of the word "direct" as a reasonably proximate causal nexus was not controlling. The majority interpreted "direct" to mean immediacy and certainty, and applied the FTAIA to deny application of the Sherman Act to an agreement specifically designed to preclude the sale of new varieties of tomatoes and tomato seeds in the United States. This holding will perpetuate injury to U.S. consumers in a multibillion dollar market and undercut antitrust enforcement potentially immunizing anticompetitive restraints precisely when they successfully deter the development of new products. The case merits panel and en banc rehearing for four reasons:
1. The FTAIA does not show a clearly expressed purpose to change the pre-existing common law. The panel majority's holding therefore conflicts with Supreme Court precedents holding that statutes must be read with a presumption favoring retention of common law principles unless there is a clear statutory purpose to the contrary. E.g., Keene Corp. v. United States, 508 U.S. 200, 209 (1993); United States v. Texas, 507 U.S. 529, 534 (1993).
2. The panel decision also conflicts with United States v. Nippon Paper Indus. Co., 109 F.3d 1 (1st Cir. 1997), in which the First Circuit applied the common law jurisdictional test to foreign conduct alleged to violate the antitrust laws.
3. The panel decision misreads the FTAIA and erroneously applies it to anticompetitive conduct that affects domestic or import commerce, both of which are excluded from the scope of the FTAIA by its terms.
4. Because an ever-increasing number of antitrust cases involve foreign conduct, and the FTAIA standard governs civil and criminal enforcement actions brought by the United States as well as private actions, the panel decision "substantially affects a rule of national application in which there is an overriding need for national uniformity." 9th Cir. R. 35-1.
The United States filed this case on September 15, 2000 to protect the interests of millions of U.S. consumers and thousands of growers of tomatoes. There is substantial and undisputed demand in this country for long shelf-life tomatoes that, unlike most current varieties, can be picked when ripe in the southern United States or Mexico during the winter and still taste good on arrival at stores in the northern United States. That demand is frustrated by the horizontal non-compete agreement that the United States sought to enjoin here as a violation of Section 1 of the Sherman Act.
That agreement perpetually excludes Hazera Quality Seeds, Inc., an Israeli company that is one of the world leaders in tomato seeds, from (1) selling currently existing or future long shelf-life seeds to U.S. growers, and (2) selling currently existing or future seeds to growers in Mexico who would export the bulk of the resulting tomatoes to the United States. The non-compete agreement thereby reserves all sales in North America to defendants LSL and Seminis, the combined market share for which the United States alleged "likely exceeds 70 percent." United States v. LSL Biotechnologies, Inc. et al., No. 02-16472 (9th Cir. Aug. 11, 2004), slip op. 11014 (attached as Addendum).
This blatantly anticompetitive agreement is much like Boeing and Airbus, competitors now vying to develop the next generation jumbo passenger jet, agreeing to allocate all U.S. airlines to Boeing and all European airlines to Airbus. The agreement excludes a foreign competitor, but it is aimed directly at U.S. markets, and U.S. consumers and growers of tomatoes are its victims.
The United States' complaint alleged that, but for the non-compete agreement, Hazera would "likely be a significant competitor of defendants in North America" (¶ 3), and that Hazera is "one of the few firms with the experience, track record and know-how likely to develop seeds that will allow United States and other North American farmers to grow better fresh-market tomatoes for United States consumers during the winter months" (¶ 39). See slip op. 11014.
The district court dismissed the United States' complaint. The court treated the United States' allegation of a restraint on Hazera selling seeds to growers in the United States as "domestic conduct" and held that subject matter jurisdiction existed over those allegations. But the court dismissed them under Fed. R. Civ. P. 12(b)(6) for what the court considered to be an overbroad market definition. The court then held that the United States' allegation of a restraint on Hazera selling seeds to growers in Mexico did not allege a "direct" effect on U.S. commerce under the "direct, substantial, and reasonably foreseeable" standard of the FTAIA, 15 U.S.C. 6a(1), which the court read as more demanding than the pre-FTAIA common law. The court drew a distinction between seeds and tomatoes, such that a restraint on selling seeds could not have a "direct" effect on the U.S. market for tomatoes. The court thus dismissed the complaint with respect to what it deemed "foreign conduct" for lack of subject matter jurisdiction, pursuant to Fed. R. Civ. P. 12(b)(1).(1)
On appeal, the panel majority affirmed, holding: (1) that the FTAIA did not codify the pre-FTAIA common law test for jurisdiction, but rather established a new test, slip op. 11019-21; (2) that the United States did not allege any "direct" effects because the impact of the potential competition that Hazera provides is neither immediate nor certain, id. at 11023-24; and (3) that the district court did not clearly err in holding that the effect of the Restrictive Clause on prices paid by U.S. consumers is not "direct" because "[t]he government has presented no evidence that LSL has or will artificially inflate the prices it charges to Mexican farmers for LSL's long shelf-life seeds." Id. at 11025.(2)
Senior Judge Aldisert, sitting by designation, wrote a lengthy and detailed dissent. He concluded that the FTAIA is best read as having codified the pre-existing common law, because that interpretation is consistent with more than 100 years of antitrust case law; the Restatement (Second) of Foreign Relations Law of the United States that was in effect at the time Congress enacted the FTAIA; leading antitrust treatises; Department of Justice guidelines; and the legislative history of the FTAIA. Slip op. 11032-44. He further concluded that the United States sufficiently alleged a "direct" effect on U.S. commerce in the sense of a proximate cause relationship between the restraint (the non-compete agreement) and the effect (no tomatoes from Hazera seeds). "The United States alleged a restraint on the very tomato seeds that grow into tomatoes in Mexico expressly for shipment to the United States. The consequences to the commerce of tomatoes in the United States are immediate . . . . [I]t is difficult to imagine foreign conduct that would have a more direct effect on United States commerce." Id. at 11049.
Judge Aldisert also agreed with the United States that this case is factually analogous to Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993), in which the Supreme Court treated an alleged foreign restraint on one product (reinsurance) as satisfying the common law test and the FTAIA (even assuming that the statute changed the prior law) by having an effect on a different, but closely related product in the U.S. (primary insurance). "If a restraint on reinsurance in the United Kingdom has a sufficiently 'direct' effect on primary insurance in the United States under the FTAIA, it is impossible to see how a restraint on tomato seeds in Mexico does not have an equally direct effect on the resulting tomatoes in the United States." Id.
Judge Aldisert then reached the Fed. R. Civ. P. 12(b)(6) issue, which the majority did not address, and concluded that the district court erred in that ruling as well. Slip op. at 11052-61.
The panel majority's decision makes four fundamental legal errors that merit panel rehearing and en banc review.
1. The panel majority held that the FTAIA's use of the word "direct" represents a change from the pre-FTAIA common law test for application of the Sherman Act to foreign antitrust conduct. Slip op. 11019-21. The Supreme Court, however, has long recognized a fundamental canon of construction requiring "statutes which invade the common law . . . to be read with a presumption favoring the retention of long-established and familiar principles, except when a statutory purpose to the contrary is evident." United States v. Texas, 507 U.S. 529, 534 (1993) (quoting Isbrandtsen v. Johnson, 343 U.S. 779, 783 (1952)).(3)
The FTAIA does not show any clearly expressed intention to change the common law. Judge Aldisert's opinion explains at length that the pre-FTAIA common law already included a requirement of directness, so that the FTAIA is consistent with the prior law. Slip op. 11032-36. Congress wrote the FTAIA against that background, and the legislative history says that the purpose of the FTAIA was to "serve as a simple and straightforward clarification of existing American law," slip op. 11021 (emphasis added). And in Hartford the Supreme Court stated that it was "unclear " whether the FTAIA "amends existing law or merely codifies it." 509 U.S. at 797 n.23 (emphasis added). See also F. Hoffman-LaRoche Ltd. v. Empagran S.A., 124 S. Ct. 2359, 2366 (2004) (15 U.S.C. 6a(2) is ambiguous).
"Direct" therefore cannot be construed to mean anything more than it meant in the pre-FTAIA common law. This meaning, as Judge Aldisert explains, is a reasonably proximate causal nexus, i.e., a causal connection that is not too remote. Slip op. 11045-48. The majority did not analyze the pre-FTAIA common law, and it departed from the "existing" law by giving "direct" an entirely different meaning not in terms of causal connection but rather immediacy and certainty.(4)
2. The panel majority's decision also conflicts with United States v. Nippon Paper Indus. Co., 109 F.3d 1 (1st Cir. 1997). Like this case, Nippon involved foreign conduct that allegedly was aimed at and affected U.S. markets. The First Circuit followed Hartford and applied the common law test. See 109 F.3d at 4 ("the case law now conclusively establishes that civil antitrust actions predicated on wholly foreign conduct which has an intended and substantial effect in the United States come within Section One's jurisdictional reach"). The panel majority here chose not to follow Hartford, distinguishing it on the ground that the defendants there "apparently concede[d]" jurisdiction. Slip op. 11026 (quoting 509 U.S. at 795). The First Circuit, however, expressly considered and rejected that argument. See 109 F.3d at 4 n.3.(5) The First Circuit is correct, for the Supreme Court made clear that jurisdiction was not conceded by all the defendants: "One of the London reinsurers, Sturge. . . argues that the Sherman Act does not apply to its conduct. . . ." 509 U.S. at 795 n.21. In any event, a party cannot concede subject matter jurisdiction when it does not exist. Fed. R. Civ. P. 12(h)(3); Matheson v. Progressive Speciality Ins. Co., 319 F.3d 1089, 1090 (9th Cir. 2003). If there truly had been no subject matter jurisdiction in Hartford, the Supreme Court would have dismissed the case.
3. The panel majority's holding is that an effect that is neither immediate nor certain cannot be "direct." Slip op. 11023-24. This holding is wrong because it contradicts the plain sense in which "direct" is used in the FTAIA; will have perverse effects; renders the statutory term "reasonably foreseeable" largely meaningless; and is completely unsupported by legal authority or antitrust principles.
As used in the FTAIA, "direct" is a term of causation: the causal connection between the anticompetitive conduct and the effect must be "direct." Indeed, this Court previously has said that "'[d]irectness' in the antitrust context means close in the chain of causation.'" In re Ins. Antitrust Litig., 938 F.2d 919, 926 (9th Cir. 1991) (quoting R.C. Dick Geothermal Corp. v. Thermogenics, Inc., 890 F.2d 139, 147 (9th Cir. 1989)), aff'd in part, rev'd in part by Hartford. But the panel majority's actual holding here has nothing to do with directness as a matter of causal nexus, but rather relates to the timing and certainty of the alleged effect.
The majority's holding focused on timing, emphasizing that the restraint produces no palpable effect on innovation or price today. But there is always some time between any cause and effect, and the length of that time is irrelevant to causality: the causal link between the firing of a gun and the impact of the bullet is equally direct no matter how far the marksman stands from the target. The majority also focused on certainty, emphasizing that Hazera might never market the relevant seeds. But certainty is not a proxy for directness: the further the marksman stands from the target, the less certain he is of hitting the target, but the causal link between firing the gun and hitting the target is equally direct whatever the distance.
The majority's interpretation of "direct" attempts to draw a distinction between effects on actual competition and effects on potential competition, which is its second way of attempting to distinguish Hartford. See slip op. 11026. To be sure, there are significant differences between restraints on actual and potential competition, as a matter of substantive antitrust law. But the United States appeals from a Fed. R. Civ. P. 12(b)(1) jurisdictional dismissal. There is nothing in the text or legislative history of the FTAIA, or in the case law, that supports the majority's jurisdictional distinction in directness between actual and potential competition cases.
Worse, the majority's unsupported distinction will have the perverse effect of immunizing anticompetitive restraints from legal challenge when the restraints are imposed early enough to deter the development of competing products. "[S]uffice it to say that it would be inimical to the purpose of the Sherman Act to allow monopolists free reign to squash nascent, albeit unproven, competitors at will." United States v. Microsoft Corp., 253 F.3d 34, 79 (D.C. Cir.) (en banc), cert. denied, 534 U.S. 952 (2001). See also FTC v. PPG Indus., Inc., 798 F.2d 1500, 1504-06 (D.C. Cir. 1986) (merger that eliminates competition to develop new technologies violates antitrust laws); United States v. Visa U.S.A., Inc., 344 F.3d 229, 241 (2d Cir. 2003) (exclusionary rules restrained competition that would have yielded "new and better products and services").
By taking "direct" to mean certainty, the panel majority robs another term of the FTAIA "reasonably foreseeable" of much of its meaning. "Reasonably foreseeable" encompasses a broad range of possibilities, from effects that are very likely to effects that are not particularly likely but still plainly possible. But if an effect must be reasonably certain, it cannot be merely possible or somewhat likely. Requiring effects to be reasonably certain i.e., very foreseeable thereby shrinks the scope of "reasonably foreseeable" to the point of rendering that term largely meaningless, a result that Congress cannot be presumed to have intended. The term "direct" therefore must have a different meaning than was assumed by the majority.(6)
The majority's interpretation of "direct" also violates norms of statutory construction and reaches the strange result that the effect of defendants' restraint on U.S. commerce, though proximately caused, was nonetheless not direct.
The panel's first means of statutory construction was the dictionary.(7) It said: "A dictionary published contemporaneously with the enactment of the FTAIA defined 'direct' as 'proceeding from one point to another in time or space without deviation or interruption.'" Slip op. 11022-23. But, as Judge Aldisert explained in dissent, the "same dictionary source contains seven main meanings in the adjective form, encompassing 31 more specific subsidiary meanings. . . . All of those meanings are contemporary with the FTAIA, enacted in 1982, and many are both ordinary and common." Id. at 11045. "The existence of alternative dictionary definitions . . . each making some sense under the statute, itself indicates that the statute is open to interpretation." Nat'l R.R. Passenger Corp. v. Boston & Maine Corp., 503 U.S. 407, 418 (1992). See also Hartford, 509 U.S. at 797 n.23 (unclear how FTAIA might apply). The majority simply never mentioned the other pertinent dictionary definitions, and the dissent was right to say: "It would be arbitrary simply to pick one definition and declare it the 'plain meaning' in the abstract." Slip op. 11045.
Critically, another dictionary definition of "direct" is both pertinent and sensible: "characterized by or giving evidence of a close specially logical, causal, or consequential relationship." Webster's Third New International Dictionary 640 at 3a (1981). See Slip op. 11045 (dissent). This definition is "informed by the FTAIA's context and history." Id. The FTAIA had "the goal of achieving clarity" about the antitrust laws' reach over international business transactions. Id. at 11021 (majority). And this definition gives clarity by essentially expressing what the law has long called "proximate cause." This is particularly important in FTAIA interpretation because at the time the FTAIA was enacted, a major area of antitrust law private plaintiffs' antitrust standing treated the terms "directness" and "proximate cause" as comparable. In Blue Shield of Virginia v. McCready, 457 U.S. 465 (1982), the Supreme Court faced the issue of which persons have sustained injuries too remote from an antitrust violation to give them standing to sue for damages under Section 4 of the Clayton Act. In answering this question, the Court observed that, historically, some antitrust cases formulated a test for remoteness that equates it with "directness" (id. at n.12), and it suggested that both terms are analogous to the common law concept of "proximate cause." Id. nn.12, 13. See also In re Ins. Antitrust Litig., 938 F.2d at 926 ("Directness in the antitrust context means close in the chain of causation") (citation omitted).
The panel majority's failure to use the correct proximate cause definition of "direct" was not only a serious legal error, but it demonstrably led to the wrong result. The defendants never argued that the United States failed to show proximate causation, and Judge Aldisert's dissent explains convincingly why the facts establish proximate causation. Slip op. 11048-49. The majority never even used the term "proximate cause."
Furthermore, to define "direct" as "proximately caused" is a reminder that public policy undergirds concepts such as "proximate cause" and "direct." See id. The "policy unequivocally laid down by the [Sherman] Act is competition," N. Pac. Ry. Co. v. United States, 356 U.S. 1, 4-5 (1958), and the FTAIA, which is part of the Sherman Act, should be interpreted in light of its fundamental purpose to protect U.S. consumers. The majority's interpretation, however, frustrates that fundamental purpose. Under its logic, the Sherman Act applies in the case of a restraint that does not entirely exclude the potential competitor from the United States. But the Sherman Act does not apply because of the FTAIA in the case of a restraint that does entirely exclude the potential competitor from the United States. This reading turns both the Sherman Act and the FTAIA on their heads.
4. The panel majority's approach misreads the FTAIA to apply to conduct that it was not intended to address. The majority never explains why the FTAIA even applies to the conduct described by the district court as "domestic conduct," i.e., the restraint on Hazera's ability to develop and sell seeds to growers in the United States, as opposed to Mexico. That conduct is either domestic or potential import commerce, to which the FTAIA, by its terms, does not apply. The majority's reasoning that subject matter jurisdiction must be evaluated in terms of the case as a whole (slip op. 11016-17) does not answer this question. Nor does the majority explain why jurisdiction cannot exist as to some allegations of a complaint even if it is lacking with respect to other allegations, when a single restraint has several independent effects.
The petition should be granted, the panel's decision vacated, and the district court's order reversed.
Certificate of Compliance Pursuant to Circuit Rule 40-1 for Case Number 02-16472
I certify that pursuant to Circuit Rule 40-1, the attached Petition for Panel Rehearing and Suggestion for Rehearing En Banc is:
Proportionately spaced, has a typeface of 14 points or more and contains 4,190 words.
Dated: September 23, 2004
I, Steven J. Mintz, hereby certify that today, September 23, 2004, I caused copies of the accompanying United States of America's Petition for Panel Rehearing and Suggestion for Rehearing En Banc to be served on the following by Federal Express:
1. The United States' complaint did not characterize any conduct as "foreign" because the critical conduct in this case is the non-compete agreement itself, and, contrary to the panel majority's assertion (slip op. 11016), the agreement apparently was executed in New York. See Excerpts of Record ("ER") 81 and Addendum to U.S. Reply Br. Defendants conceded, for present purposes, that the agreement's effect on U.S. commerce was "reasonably foreseeable." The district court did not address the term "substantial" except for three words, and did not say what would constitute a substantial effect.
2. The majority's conclusion that no "direct" effect was alleged is based on the clearly mistaken premise that "Hazera has not yet developed its own long shelf-life tomato seeds capable of cultivation in North America." Slip op. 11024 n.7. The United States submitted sworn affidavit testimony that since 1996 Hazera has sold "greenhouse" tomato seed varieties in North America, some of which yield long shelf-life tomatoes, and growers in Mexico and California have planted them in open fields. "By my estimate, about ten percent of the non-summer fresh tomatoes consumed by United States consumers now come from Hazera." Declaration of Amit Schwarz ¶ 20, ER 162-63 (emphasis added). Moreover, some Florida growers currently buy existing Hazera virus-resistant "extended shelf-life" seeds, even though they were developed for other regions. Id. ¶ 24, ER 165. Competition from Hazera therefore is not "speculative," as the majority says. The non-compete agreement and defendants' litigation to enforce it have, however, deterred Hazera from modifying some of its other, currently existing long shelf-life seeds, designed for other regions of the world, specifically to fit North American climate zones. See id. ¶¶ 7, 22, 23, 25, 26, ER 158-66. But as Judge Aldisert points out, "Hazera cannot be faulted for not producing seeds in Mexico or the United States, as it has done elsewhere, because the Restrictive Clause prohibits it from doing so." Slip op. 11050 n.6.
Whether current or future Hazera seeds infringe LSL's patent rights, slip op. 11023, 11024 n.7, is irrelevant to the issue of whether there is a "direct" effect and jurisdiction under the FTAIA. If the seeds are infringing, which Hazera denies, then LSL can sue for patent infringement.
3. Accord, e.g., Keene Corp. v. United States, 508 U.S. 200, 209 (1993) ("we do not presume that the revision worked a change in the underlying substantive law unless an intent to make such a change is clearly expressed"); Green v. Bock Laundry Mach. Co., 490 U.S. 504, 521 (1989) ("A party contending that legislative action changed settled law has the burden of showing that the legislature intended such a change.").
4. McGlinchy v. Shell Chem. Co., 845 F.2d 802 (9th Cir. 1988), cited by the majority (slip op. 11021), does not support the majority's decision. That case did not even raise the question of whether to read the FTAIA as changing the common law. But to the extent that it could be read that way, it was overruled by the Supreme Court's differing view in Hartford, five years later, that the FTAIA is "unclear" on that point. The issue is not whether the FTAIA "provides the guiding standard" here, slip op. 11021 it plainly does but what the FTAIA means.
5. The United States alerted the panel to Nippon in a Fed. R. App. P. 28(j) letter dated August 12, 2003.
6. By contrast, the correct understanding of "direct" as a requirement of causation does not make it redundant of "reasonably foreseeable." Defendants conceded reasonable foreseeability for purposes of their motion to dismiss but do not concede a proximate cause relationship, thereby confirming that the two concepts are not identical. Under a proximate cause interpretation of "direct," the FTAIA would screen out cases in which foreign conduct has a reasonably foreseeable effect in the United States, but the effect is too remote from the conduct.
7. The majority's only other source for interpretation of "direct" was the phrase "direct effect" in the Foreign Sovereign Immunity Act ("FSIA"), 28 U.S.C. 1605(a)(2), as interpreted by the Supreme Court to mean "follows as an immediate consequence of the defendant's activity." Slip op. 11023 (quoting Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 618 (1992)). The FSIA, however, deals with a different subject from the FTAIA: the scope of the immunity of foreign nations from suit under any statute in U.S. courts. There is nothing in the legislative history of the FTAIA indicating that Congress was influenced by the FSIA. Moreover, the Weltover language on its face is different from the panel majority's dictionary definition, and, as Judge Aldisert explained, is wholly consistent with upholding the United States' complaint. Slip op. 11046.