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Extraterritorial Reach of Antitrust Laws: The FSIA

We have written extensively about the scope of the Foreign Trade Antitrust Improvement Acts and the extraterritorial reach of U.S. antitrust laws. (You can read our latest update on Motorola Mobility LLC v. AU Optronics Corp. here.) Now, the scope of the U.S. antitrust laws has arisen in a different context: the Foreign Sovereign Immunities Act (“FSIA”).

In December 2013, the Judicial Panel on Multidistrict Litigation assigned to Judge Forrest (Southern District of New York) a series of cases alleging antitrust violations in connection with the rates for warehousing metal. One of the defendants—the London Metal Exchange (the “LME”)—was accused of conspiring with metal banks and warehousers to inflate storage costs by slowing the movement of aluminum out of LME-approved warehouses. LME is a privately owned company that is headquartered in London. Plaintiffs further alleged that LME provides a platform for trading industrial metal contracts and that over 80% of the world’s non-ferrous metals futures transactions occur on LME’s trading platforms.

On August 25, 2014, the Court issued a decision dismissing the LME from the litigation, finding that LME is an “organ” of the United Kingdom and therefore immune from suit under the FSIA. The FSIA provides that a foreign state is immune from the jurisdiction of U.S. courts unless one of several exceptions applies. Judge Forrest found that the LME is immune from suit because (1) it is an “organ” of the United Kingdom and (2) it does not fall within an exception because it was “not engaging in commercial activity when it allegedly manipulated the load-out rules for aluminum.”

“Organ” of a Foreign State: The Court found that the LME is a recognized investment exchange (“RIE”) under U.K. law. As an RIE, the LME is regulated by the U.K. Financial Conduct Authority (the “FCA”) and if the FCA finds that LME has failed to satisfy various requirements, it may revoke LME’s status. One of these requirements is that the LME must maintain an orderly market, which it achieves by regulating certain price functions for metals traded on the exchange. Under U.K. law, actions taken by LME are immunized from private suit absent a showing of bad faith. Judge Forrest acknowledged that, “[w]hen first presented with this question . . . the Court’s initial reaction was that the LME was an unlikely candidate for an organ of the U.K. Government” because it “is a privately held and for-profit company[.]” Judge Forrest held, however, that “a foreign state need not have any ownership interest in an entity for it to be an ‘organ’ of that state.” Applying a multipart test established by the Second Circuit in Filler v. Hanvit Bank, 378 F.3d 213 (2d Cir. 2004), the Court determined that the LME is an organ of the United Kingdom because it is (1) “charged by statute with performing the decidedly public function of market regulation,” (2) actively supervised by the FCA, and (3) immunized, under certain circumstances, by U.K. law.

Commercial Activities: Judge Forrest further concluded that the LME’s alleged activities—entering into a conspiracy to restrain aluminum output and increase the price of aluminum—are not properly considered as commercial activities. The Court concluded that LME’s intent “to make more money is irrelevant” and that not all contractual arrangements, including the various contracts with metal storage warehouses, are commercial in nature because “[t]here are numerous instances in which a public organ might use a contractual arrangement to fulfill its public function.”

On September 8, 2014 Plaintiffs filed a motion for reconsideration. Plaintiffs noted that LME has U.S. trademarks and has engaged in a registration process with the U.S. Commodity Futures Trading Commission, both activities that suggest LME understood that it was subject to U.S. legal requirements. Plaintiffs also pointed to recent law—including a June 2014 Supreme Court decision in Republic of Argentina v. NML Capital Ltd., 134 S. Ct. 2250—that they argued undermined Judge Forrest’s analysis of the FSIA. The motion for reconsideration was fully briefed on October 2, 2014, but has not yet been decided.

Just as, in initially considering Motorola Mobility LLC v. AU Optronics Corp., the Seventh Circuit expressed skepticism about applying U.S. laws to overseas conduct, Judge Forrest’s recent opinion reflects a similar hesitation to apply U.S. antitrust laws to overseas corporations that are heavily regulated by their home countries. Regardless of how Judge Forrest rules on the motion for reconsideration, the case will have implications for the global conduct of corporations that perform “public functions” and are heavily regulated by other jurisdictions.