Seventh Circuit Rejects Claims Against A Foreign Price-Fixing Cartel And Includes A Lesson On Twombly

Thursday, November 17, 2011 - 14:28

In Minn-Chem Incorporated v Agrium Incorporated,1 the Seventh Circuit held that a class action alleging an offshore conspiracy to raise the price of potash should have been dismissed because the conduct complained of was either exempt under the Foreign Trade Antitrust Improvements Act (FTAIA)2 or was insufficient to state a cause of action under the pleading standards of Twombly/Iqbal

Background: The Global Potash Cartel

Potash is a mineral used in the production of agricultural fertilizer. Most of the world’s potash reserves are in Canada, Russia, and Belarus, where defendants’3 principal operations are located. The defendants are the seven largest potash producers, accounting for 71 percent of the world’s supply.4 The plaintiffs are either direct or indirect purchasers of potash from the defendants in the U.S.5

The plaintiffs alleged that the defendants conspired to restrict output and increase prices of potash. As proof of the conspiracy, they alleged that (i) the price of potash increased in the U.S. 600 percent during 2003-2008, the conspiracy period, even though the defendants had significant excess capacity and price increases could not be related to increases in costs;6 (ii) the potash industry is an oligopoly characterized by high market concentration and high barriers to entry;7 (iii) the industry exhibits a high degree of cooperation with many opportunities to conspire and to share information as a result of common stock ownership, joint ownership in export companies,8 and meetings at fertilizer association conferences;9 (iv) the defendants engaged in various specific parallel business decisions, resulting in reductions in output and increases in prices in China, Brazil and India;10 and (v) demand for potash is relatively inelastic because there are no substitutes.11

Significantly, the complaint alleged that all of the anticompetitive conduct occurred outside of the U.S.12 Moreover, the complaint did not allege that the offshore defendants specifically agreed to a U.S. price or production quotas for potash, or even that a global cartel price was set.13 As noted by the Seventh Circuit:

The only link between the activities of this wholly foreign conspiracy and the U.S. potash market are general allegations that potash prices in the United States were adversely affected by the coordinated price hikes in Brazil, China, and India. That is, the complaint alleges that the cartelized prices in these foreign markets served as a “benchmark” for potash sales in this country.14

District Court Decision

The district court denied the defendants’ motion to dismiss, holding that the FTAIA extends the extraterritorial reach of the Sherman Act to conduct involving import commerce and that plaintiffs’ complaint alleged sufficient facts linking defendants’ offshore conduct to U.S. imports. The court reasoned that because the defendants imported potash into the U.S. and were generally accused of conspiring to fix the price of potash globally, there was a sufficiently “tight nexus between the alleged illegal conduct and [d]efendants’ import activities . . . to conclude that the former ‘involved’ the latter.”15

Because of the importance of the issue and the ambiguity of the statute, the district court certified its order for immediate appeal under 28 U.S.C. § 1292(b).16 On appeal, the defendants argued in the alternative either that the FTAIA deprived the court of jurisdiction to hear the case or that the complaint failed to state a claim under the pleading standard of Twombly/Iqbal,17 that is, by relying on parallel business conduct in a context that does not “raise[ ] a suggestion of a preceding agreement,”18 the complaint did not “plausibly” state a claim for relief.19

The Seventh Circuit Opinion Holding

The Seventh Circuit reversed, holding that the FTAIA mandated dismissal of plaintiffs’ antitrust suit whether the statute was construed as creating a threshold jurisdictional requirement or as adding an element of a Sherman Act claim. “Because the result is the same either way …,” a dismissal is required. “Our substantive review of the FTAIA is no different whether viewed through the lens of Rule 12(b)(1) [lack of jurisdiction] or Rule 12(b(6) [failure to state a claim].20 Although the Court also stated that “we need not decide the question of the broader sufficiency of the complaint under Twombly and Iqbal,21 as discussed below, the Court, in fact, did interpret FTAIA through the lens of the Twombly/Iqbal “plausibility” pleading standard.22

The Seventh Circuit’s Reasoning

The Seventh Circuit initially acknowledged that FTAIA is a difficult statute to analyze: it is not clear whether the statute states a jurisdictional requirement or adds an element to a plaintiff’s Sherman Act claim and, in addition, it is poorly phrased. 

Jurisdictional Bar Or Element Of A Cause Of Action?

The initial question before the Seventh Circuit was whether FTAIA stripped the district court of subject matter jurisdiction, taking away its competence to hear the offshore conspiracy case on the merits. In United Phosphorus, Ltd. v. Angus Chemical Co., the Seventh Circuit, sitting en banc, had held that the FTAIA was indeed jurisdictional.23 In Minn-Chem, however, the Court acknowledged that two recent Supreme Court24 decisions and a decision from another circuit25 called into question the soundness of its opinion in United Phosphorus, making it “ripe for reconsideration.”26 Nevertheless, the Seventh Circuit chose not to reconsider United Phosphorus because the “dismissal [of the complaint] is required whether the statute is properly construed to state a jurisdictional requirement or an element of the plaintiffs’ Sherman Act claim.”27

Parsing The Statutory Language Through The Lens Of Twombly

The Seventh Circuit acknowledged that the FTAIA is “awkwardly phrased,”28 but believed that the broad intent of the statute was clear. It broadly prohibits the Sherman Act’s application to anticompetitive business practices in foreign markets, while at the same time carving out two exceptions:

The Act first states a broad general rule that the Sherman Act “shall not apply” to conduct involving foreign trade or commerce. It then carves out several exceptions. As relevant here, the FTAIA restores the Sherman Act’s applicability to two categories of foreign anticompetitive conduct: (1) foreign anticompetitive conduct “involving . . . [U.S.] import trade or import commerce”; and (2) foreign anticompetitive conduct that “has a direct, substantial, and reasonably foreseeable effect” on U.S. domestic or import trade or commerce. 15 U.S.C. §§ 6a & 6a(1)(A).29

The complaint could survive, therefore, only if the anticompetitive activity, all of which occurred outside the U.S., either “directly involved” U.S. import commerce or had a “direct, substantial and reasonably foreseeable effect” on U.S. domestic or import commerce. 

To resolve this issue, the Court evaluated the facts alleged regarding impact on the U.S. through the lens of the Twombly/Iqbal pleading standard.30 The Twombly/Iqbal rule requires that a complaint must contain sufficient factual allegations to state a claim for relief that is plausible on its face.31 Further, “[t]he plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.”32 Applying this standard, the Seventh Circuit found that the allegations of the complaint did not plausibly support either the import exception or the direct effects exception.

The district court had held that the “import commerce” exception applied because the defendants generally were involved in importing potash to the U.S. The Seventh Circuit disagreed because this conflated the requirements of the two exemptions to FTAIA, rendering the distinction between them meaningless.33 Instead, in order to meet the “import commerce” exception, the Seventh Circuit reasoned that the foreign anticompetitive conduct must directly target import commerce:

Contrary to what the district court seemed to think, it is not enough that the defendants are engaged in the U.S. import market, though that may be relevant to the analysis. Rather, “the import trade or commerce exception requires that the defendants’ [foreign anticompetitive] conduct target [U.S.] import goods or services.”[emphasis added].34

While it is true that the complaint alleged that defendants imported potash into the U.S., the complaint did not allege that the conspiracy involved the potash that was actually imported. The complaint did not “allege any specific facts to support a plausible inference that the offshore defendants agreed to an American price or production quota for potash.”35 In short, the complaint only generally “alludes to a link between the cartelized prices in . . .  foreign markets and American potash prices.”36

The district court’s analysis more closely fits the exception to FTAIA that permits the Sherman Act to extend to anticompetitive conduct in foreign nations that has a “direct, substantial and reasonably foreseeable effect on U.S. domestic or import commence” regardless of whether the overseas anticompetitive conduct actually involves the U.S. import market.37 But this test requires that the effects follow “as an immediate consequence of the defendant’s activity;”38 and here, the effect in the U.S., as the Seventh Circuit read the complaint, was the end result of a “cryptic” chain of events that “relied on too many intervening variables.”39 Rather than a direct effect, the complaint at best alleged a “ripple” effect on the U.S., but “the FTAIA prevents the Sherman Act from reaching such ‘ripple effects.’”40

Conclusion: The Devil Is In The Details

In In Re Text Messaging Antitrust Litig.,41 the Seventh Circuit affirmed the denial of a motion to dismiss a complaint alleging an antitrust conspiracy based on parallel business conduct. Like the complaint in Minn-Chem, the complaint in In Re Text Messaging alleged a highly concentrated market particularly susceptible to collusion; alleged that defendants belonged to a trade association and exchanged price information at association meetings; alleged that defendants simultaneously changed their heterogeneous pricing structures to a uniform pricing structure; and that defendants made across-the-board increases in price.42

In light of In Re Text Messaging, why did the Minn-Chem complaint fail to survive? The Seventh Circuit acknowledged that the Minn-Chem complaint was “lengthy” and contained “many specific factual allegations.”43 The Court further acknowledged that the complaint alleged that cartelized prices in China, India and Brazil served as a “benchmark” for U.S. prices. Nevertheless “something more” was required, namely a factual description of how the benchmark worked, and how, presumably, it led to an agreement as well as harm in the U.S.44 The complaint failed to do this, relying instead on a “conclusory and unhelpful” remark by an unnamed analyst that there was a global fertilizer market. “The complaint provides no context whatsoever for this statement that might make it more meaningful.”45 Thus, the complaint contained “very little of substance” concerning the key issue, namely “the relationship between the defendants’ alleged overseas anticompetitive conduct and the American domestic market for potash,”46 and without those specific allegations Twombly/Iqbal required dismissal.47

1 Minn-Chem Incorporated v Agrium Incorporated, No. 10-1712 (7th Cir., Sept. 23, 2011) (hereinafter Minn-Chem).

2 15. U.S.C. § 6a. The statute provides, in relevant part, that the Sherman Act: “shall not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations unless–

(1) such conduct has a direct, substantial, and reasonably foreseeable effect –

(A) on trade or commerce which is not trade or commerce with foreign nations, or on import trade or import commerce with foreign nations; or 

(B)on export trade or export commerce with foreign nations, of a person engaged in such trade or commerce in the United States; and

(2) such effect gives rise to a claim under [the Sherman Act].

3 Agrium Inc., Potash Corporation of Saskatchewan Inc., The Mosaic Company, JSC Uralkali, JSC Silvinit, JSC Belarusian Potash Company, and JSC International Potash Company.

4 Minn-Chem, at 5.

5 Id. at 3 (direct purchasers: Minn-Chem, Inc.; Gage’s Fertilizer and Grain, Inc.; Kraft Chemical Company; Shannon D. Flinn; Westside Forestry Services; and Thomasville Feed & Seed, Inc.; indirect purchasers: Kevin Gillespie, Gordon Tillman, Feyh Farms Company, William H. Coaker, Jr., and David Baier).

6 Id. at 5.

7 Minn-Chem, at 6, noting that in addition to first finding a source of potash deposits, any potential entrant would incur approximately $2.5 billion in start-up costs over a five-to-seven-year development period before production could commence. 

8 See Minn-Chem, at 4, 7, noting that Canadian Defendants Agrium Inc., Potash Corporation of Saskatchewan Inc., and The Mosaic Company jointly own Canpotex, Ltd., an export company organized under Canadian law. Coordination through Canpotex is specifically authorized pursuant to Canadian law. Defendant Silvinit, a Russian company, owns IPC, its exclusive international distributor. Uralkali, a Russian company, and Rue PA Belaruskali (a Belarusian company) jointly own BPC, their distribution company. A common Russian shareholder owns 66% and 20%, respectively, of the voting stock of Silvinit and Uralkali, aligning their interests. 

9 Minn-Chem, at 6-7.

10 Id. at 7-9.

11 Id. at 6.

12 Id. at 9-10.

13 Id. at 21.

14 Id. at 9-10.

15 Id. at 19, quoting the district court.

16 28 U.S.C. § 1292(b) generally provides that an order not otherwise appealable may be certified for an appeal if the district judge believes that its order involves a controlling question of law as to which there is substantial ground for difference of opinion and an immediate appeal may materially advance the ultimate termination of the litigation.

17 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009). 

18 Minn-Chem, at 11-12, citing Twombly, 550 U.S. at 557 (“when allegations of parallel conduct are set out in order to make a § 1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action”). 

19 Minn-Chem, at 2, 10-12.

20 Id. at 16-17. 

21 Id. at 12.

22 See id. at 17-19.

23 Id. at 2, 14, citing United Phosphorus, Ltd. v. Angus Chemical Co., 322 F.3d 942 (7th Cir. 2003) (en banc).

24 See Minn-Chem, at 14-17, discussing Morrison v. Nat’l Austl. Bank, 130 S. Ct. 2869, 2876-77 (2010) (extraterritorial reach of § 10(b) of the Securities and Exchange Act of 1934 is not jurisdictional); Arbaugh v. Y & H Corp., 546 U.S. 500, 515-16 (2006) (numerical qualification contained in Title VII’s definition of employer is not jurisdictional, as jurisdictional stripping requires a clear legislative statement). 

25 Animal Sci. Prods., Inc. v. China Minmetals Corp., No. 10-2288, 2011 WL 3606995 (3d Cir., Aug. 17, 2011) (FTAIA does not impose a jurisdictional limit but establishes an element of a Sherman Act claim).

26 Minn-Chem, at 3, 16.

27 Id. at 16-17.

28 Id. at 13. See fn. 2 for text of statute.

29 Minn-Chem, at 13; see also id. at 17.

30 Minn-Chem, at 17-18 (“To determine whether the plaintiffs have done enough at the pleading stage to bring their claim within either of these exceptions, we are required to evaluate their complaint in light of the ‘plausibility’ pleading standard announced in Twombly and further explained in Iqbal.”).

31 Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).

32 Iqbal, 129 S. Ct. at 1949.

33 Minn-Chem, at 19-20.

34 Minn-Chem, at 20, quoting Animal Sci. Prods., Inc. v. China Minmetals Corp., No. 10-2288, 2011 WL 3606995 at 5 (3d Cir. Aug. 17, 2011); see also Minn-Chem, at 23.

35 Id. at 22, 23.

36 Id. at 24.

37 Id. at 20.

38 Minn-Chem, at 20, quoting United States v. LSL Biotechs., 379 F.3d 672, 680 (9th Cir. 2004) (citing Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 618 (1992)).

39 Minn-Chem, at 26.

40 Id., citing In re Intel Corp. Microprocessor Antitrust Litig., 452 F. Supp. 2d 555, 561 (D. Del. 2006). See also Rubber Chemicals Antitrust Litigation, 504 F.Supp.2d 777, 785-86 (N. D. Cal., 2007); Emerson Electric Co. v. Le Carbone Lorraine, S.A., 500 F. Supp. 2d 437, 445-47 (D. N.J. 2007).

41 630 F.3d 622 (7th Cir. 2010).

42 Id. at 627-29.

43 Minn-Chem, at 22.

44 Id. at 25.

45 Id.

46 Id., see also id. at 22-26.

47 Plaintiffs-Appellees filed petition for rehearing en banc on October 7, 2011. The American Antitrust Institute has filed an amicus curiae supporting the petition.

Alan R. Kusinitz is a Litigation Associate practicing in the area of antitrust/competition law.

Please email the author at alan.kusinitz@weil.com with questions about this article.