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Description
[Expanding globalisation has resulted in the growth of anti-competitive commercial activities that are transnational or have transnational effects. In the absence of a global competition agreement, as countries experience the consequences of foreign anti-competitive conduct, they will be forced to consider the range of remedial strategies available to them. One strategy is to look for a positive comity solution. Another strategy is to apply domestic competition laws extraterritorially. This article is essentially concerned with the latter strategy. While there are some notional advantages to applying domestic competition rules extraterritorially, the limitations or difficulties in doing so are formidable. The result is that extraterritorialism is often an ineffectual strategy.]
CONTENTS I Introduction II Positive Comity III Advantages of Applying Competition Laws Extraterritorially A Advantages to the State Applying Its Competition Law Extraterritorially B Spill-Over Benefits C Extraterritorialism Helps to Prevent a 'Race to the Bottom' IV Limitations of Extraterritorialism A Extraterritorialism Does Not Solve the Problem of the Global Welfare Deficit 1 Welfare Analysis in a World without Extraterritorialism 2 Welfare Analysis in a World Where Extraterritorialism is the Norm 3 Welfare Analysis in a World Where Extraterritorialism is Practised by Some States but Not Others 4 Assessing the Model B Extraterritorialism Does Not Solve the Problem of Duplicating Costs V Factors That Govern the Effectiveness of Extraterritoriality A Prescriptive or Subject Matter Jurisdiction 1 The Extraterritorial Application of US Antitrust Law 2 European Competition Law Extraterritorialism 3 Australian Competition Law 4 Extraterritorialism and Other States 5 Conclusion on Prescriptive Jurisdiction B Sovereignty-Related Defences 1 Foreign Sovereign Immunity 2 Act of State Doctrine 3 Foreign Sovereign Compulsion C Problem of Accessing Foreign-Based Evidence 1 Sources of Tension That Exacerbate the Difficulties of Foreign Evidence-Gathering 2 Methods of Collecting Evidence Abroad D Enforcing Competition Orders 1 Enforcing Judgments at Home against Foreign Firms 2 Enforcing Judgments Abroad VI Conclusion
I INTRODUCTION
Over the past two decades, many states have adopted competition laws as a key regulatory tool of commercial activities. (1) At the same time, expanding globalisation has resulted in the growth of commercial activities that are transnational or have transnational implications. The confluence of these two trends has generated an interest in global competition rules. (2) To date, however, attempts to construct a global competition agreement have failed, most recently at the World Trade Organization meeting in Cancun, following which competition policy was removed from the Doha trade agenda. (3) Consequently, other than within the European Union (4) and the Andean Community, (5) regulation of international anti-competitive activities remains largely a domestic concern. (6)
As countries experience the consequences of foreign anti-competitive conduct, they will be forced to consider the range of remedial strategies available to them. (7) In the absence of a global competition agreement, one strategy is to look for a positive comity solution. The other main strategy is to apply domestic competition laws extraterritorially. These strategies are not mutually exclusive, but neither are they entirely harmonious. Indeed, in respect of any individual case, it is likely that the pursuit of one will hinder the pursuit of the other.
This article examines extraterritorialism in the context of the application of competition law. The article begins with a brief overview of the positive comity option. It then analyses the benefits of applying domestic competition law extraterritorially, before considering the disadvantages or limitations. In particular, the article examines the factors that determine the effectiveness of such extraterritorial application. The article concludes that extraterritorialism, whilst an important element of global competition enforcement, is quite limited in its capacity to solve the problems created by international anti-competitive conduct.
II POSITIVE COMITY
Positive comity first appeared in an international competition law context in the competition agreements forged between the United States and the EU in the 1990s. (8) These agreements were based on an Organisation for Economic Co-operation and Development Recommendation. (9) The object of positive comity is to allocate investigation and prosecution of anti-competitive conduct to the country in the best position to carry out those functions. (10) If anti-competitive conduct--for example the arrangement and implementation of a price fixing cartel--occurs in country A with effects in both country A and country B, country A is clearly in a better position to investigate and prosecute the cartel (although to ensure an adequate level of deterrence it may be necessary to prosecute in both states). Assuming it has not already acted, country B may request country A to act. Country A is obliged to give the request full consideration and to notify country B of its decision. Assuming it decides to act, country A then applies its domestic anti-cartel law. Country A, however, is under no binding obligation to do so. The arrangement is entirely voluntary. This is a positive comity request as envisaged by the US-EU Agreements. (11)
In principle, positive comity has a number of benefits. (12) First, by encouraging the state best placed to discipline the relevant anti-competitive activities to take the lead, it restricts the likelihood of conflict arising from the extraterritorial application of domestic competition law. Thus, positive comity reinforces traditional comity. (13) Second, positive comity promotes more effective enforcement by reducing the considerable difficulties associated with obtaining access to foreign-located evidence and witnesses, (14) and by improving the opportunity for effective remedies. (15) Finally, and more fundamentally, the positive comity agreements provide a tangible commitment to the notion of cooperation. (16)
However, positive comity also has its limitations. (17) First, a voluntary scheme is not ideal where the main problem to be overcome is protectionism. For example, assume that exporters in country A are convinced that firms in country B are acting anti-competitively to block imports from country A. As a result, the exporters have persuaded country A to make a positive comity request. The request has been made because country B has so far failed to take any action. If country B's failure to act is due to limited resources or, a fortiori, protectionist pressures, it is unlikely that the positive comity request will alter the situation. (18) On this issue the ICPAC Report commented:
the historic enforcement record of worldwide antitrust agencies does not promote unqualified confidence in the willingness of antitrust authorities to pursue action against domestic firms that impair the ability of foreign firms to compete, despite possible domestic consumer harm. In the absence of a nation's serious commitment to take such actions, the benefits of positive comity may remain modest or illusory. (19)
One respected commentator put the matter more bluntly:
It is not realistic to expect one government to prosecute its citizens solely for the benefit of another. It is no accident that this has not happened in the past, and it is unlikely to happen in the future. We should not expect the principle of positive comity ... to impact dramatically on the proposition that laws are written and enforced to protect national interests. (20)
Second, the evidence suggests that the success of a comity agreement between two states is directly related to the political, economic and legal similarities between them. (21) Where such symmetries exist, states are likely to have the necessary degree of trust and confidence in each other's legal regimes to ensure that the voluntary nature of positive comity does not defeat its purposes. (22) Without such trust and confidence, positive comity is a poor enforcement tool. For example, an ABA Report ascribed much of the blame for the failure of US interests to accept the Japanese Fair Trade Commission's ('JFTC') investigation into the conduct of Fuji in the Japan--Film dispute to a lack of trust and confidence between the states. (23) The Report stated:
Although some of the dissatisfaction [of US interests with the JFTC investigation] may be attributed to the specific outcome of this informal referral, it seems more likely that a significant portion of the dissatisfaction may be attributed to a lack of confidence in the antitrust enforcement procedures and commitment in Japan. This lack of confidence stems from a number of factors, including historically inadequate levels of antitrust enforcement within Japan and Japan's reliance on administrative guidance and informal enforcement efforts rather than on formal and transparent decision-making processes. (24)
Third, positive comity is not appropriate for certain types of anti-competitive conduct. For example, the problem with export cartels is that while the conduct occurs in one country (the exporting state), the anti-competitive effects occur in another (the importing state). A request by the importing state for the exporting state to take action faces not only possible protectionist objections, it also faces the very real possibility that the export cartel is not unlawful in the exporting state. (25) Generally, export cartels are only unlawful where there are significant adverse domestic effects. (26) In the case of many export cartels, there are few or no adverse domestic effects. (27) In those states where export cartels are prohibited without proof of adverse domestic effects, exemptions are normally available. (28)
This discussion suggests that positive comity, although useful, is not a panacea for all international anti-competitive conduct. Indeed, in practice, positive comity has only rarely been used. (29) This means that countries will inevitably have to consider the benefits and disadvantages of applying there domestic competition laws extraterritorially.
Extraterritorial application of competition law is not new; it has been a controversial feature of US antitrust enforcement for many years. (30) What is new, however, is the number of states that now have competition rules. What was once a US phenomenon has become something approaching a global standard. Inevitably, more and more states will have to decide the jurisdictional scope of their rules as they are confronted with foreign conduct that has a significant effect on their economies.
For the purposes of this discussion, extraterritoriality does not require a precise definition; indeed, it has no universally accepted definition. (31) Here it is simply used as an expression to refer to those occasions where domestic law is sought to be applied and enforced against conduct that occurs outside the territorial boundaries of the state.
III ADVANTAGES OF APPLYING COMPETITION LAWS EXTRATERRITORIALLY
There are three principal advantages in applying domestic competition laws extraterritorially. First, there are advantages to the state itself; second, there are advantages to other states (spill-over effects); and third, applying domestic competition laws extraterritorially reduces incentives for a 'race to the bottom'.
A Advantages to the State Applying Its Competition Law Extraterritorially
In the absence of a global competition agreement or a successful positive comity request, where a state suffers a loss of competition and a consequent loss of welfare from foreign conduct (such as a foreign price fixing cartel or foreign anti-competitive distribution practices), it may very well have something to gain by applying its laws extraterritorially, simply because the alternative--failing to apply its law extraterritorially--is to accept the loss.
Extraterritoriality also has advantages to the state when compared to some notional global competition agreement. Where a state is able to impose its law extraterritorially, the outcome is optimal for that state because it has not had to bargain away any elements of its preferred model. For example, one of the basic reasons for the strong US reaction against a global competition agreement was the fear that any agreement must derogate from the optimum US model. (32) There are at least two aspects to this advantage of extraterritorialism.
First, the state that is applying its law extraterritorially determines the substantive and remedial rules to be applied. This is important because states differ considerably in their estimation of the optimal shape of many competition rules, including vertical restraints, single firm conduct and mergers. (33) Even where competition rules are textually similar or even identical, their application may be quite different. There is a growing tendency in competition law to rely on open-ended, flexible standards such as 'market dominance', 'market power' and 'substantial lessening of competition'. (34) In turn, these standards rely on concepts, such as 'market' and 'competition', which are notoriously open to differences in definition and application. (35) Where no fixed or universal meaning exists, the interpretation of juridical standards is open to local cultural, political and economic factors. Extraterritoriality reduces some of the uncertainty associated with a competitive effects test because the state will have precedent to guide it. The US, for example, has developed its complex and highly nuanced interpretation of the broadly worded provisions of the Sherman Act (36) over a period of more than 100 years. (37) Global rules will lack that historical perspective.
Second, by applying its competition law extraterritorially, the state can rely on its own procedures. Procedural systems are important in most competition regimes because enforcement decisions are left neither entirely to the court system nor to a government agency. Rather, enforcement decision-making is shared and the manner of the sharing depends on local constitutional, historical and social features of the jurisdiction. (38) For example, US antitrust law relies heavily on private actions conducted through normal judicial processes. (39) US antitrust authorities are not expected to shoulder the entire responsibility for enforcement. As a result, US authorities tend to have less overt power than there counterparts elsewhere, except perhaps in the area of mergers. (40) The US system of antitrust enforcement undoubtedly reflects a broader US preference for individual responsibility and reservations about centralised power. (41) The European tradition is more accepting of centralist bureaucratic involvement. (42) Consequently, the European Commission has a significant quasi-judicial role as well as its administrative functions. In Australia, the Australian Competition and Consumer Commission ('ACCC'), through management of the authorisation process, has a broader role in shaping national competitive processes than does the US Department of Justice or the Federal Trade Commission ('FTC'). (43) The authorisation system enables the ACCC to declare conduct lawful that would otherwise be unlawful. (44) This bureaucratic tendency has been particularly noticeable in Japan where the JFTC has had a significant role in determining the practice of competition law, including deciding which suits, both public and private, may be brought under the Antimonopoly Law. (45) The JFTC itself has traditionally been a minor player in a broader administrative culture. (46) Through the mechanism of administrative guidance and its power to grant exemptions from the Antimonopoly Law, the Ministry of International Trade and Industry (47) controlled economic activities in Japan, including competition policy and practice, whatever the views of the JFTC. (48) This culture is changing as Japan adapts to a more deregulated system. (49)
B Spill-Over Benefits
There are possible advantages to other states where competition law is applied extraterritorially by one state. Although any extraterritorial application will be aimed at the anti-competitive effects occurring within the state applying its law, there will be flow-on effects to other states. Some of these effects will be beneficial (positive externalities). For example, if the US applies its antitrust law extraterritorially against a global cartel, a possible result is that the cartel will cease operations. Other states are able to free ride on US enforcement activities. This free ride may be particularly beneficial to the less developed states, many of which have either no functioning competition law or suffer from severe capacity constraints. (50) Despite possible sovereignty issues, the free ride may be an attractive proposition even where one or more of the firms are located in the developing state itself, for example, where the actors are subsidiaries of multinational enterprises. The evidence supports the view that the pursuit of international cartels during the past decade by industrialised states has produced spill-over effects beneficial to developing states. (51)
C Extraterritorialism Helps to Prevent a 'Race to the Bottom'
If there is a strong connection between the shape of a country's competition law and its attraction as a destination for foreign investment, business or trade, a country may be persuaded to shape its competition law to maximise that attractiveness.
If investors and others are attracted to strong competition laws, the result could be a race between countries to have the strongest competition regime. This might be called 'a race to the top'. (52) In this instance the 'top' is not necessarily a beneficial outcome in welfare terms. In fact, it implies over-regulation. If, as is intuitively more likely, investors and others are attracted to weak competition laws, the result could be a race between countries to have the weakest competition regime, that is, 'a race to the bottom'.
Under economic models of regulatory competition, firms will seek laws that maximise benefits to the firms' shareholders or decision-makers. Therefore, the models suggest that firms will prefer competition laws that maximise producer profits (pro-monopoly laws) over competition laws that maximise consumer welfare (pro-competitive laws). (53) In welfare terms, a system that allows firms to choose the competition laws that apply to them is therefore bound to be sub-optimal. (54)
Extraterritorialism can do little about preventing a race to the top, but it will affect the viability of a race to the bottom. Extraterritoriality means that a firm cannot necessarily protect itself from effective competition law simply by moving its anti-competitive activities to a country with weak competition law. Although extraterritoriality often proves to be ineffective, its presence means that firms cannot be sure that they are safe behind foreign borders. (55) Consequently, extraterritoriality reduces incentives for states to engage in a regulatory race to the bottom. In other words, extraterritoriality limits the opportunities for states to engage in a race to produce a sub-optimal competition standard for the purpose of attracting foreign investment, business or trade.
However, the likelihood of a race to the bottom should not be overstated. There is no evidence of any strong link between foreign direct investment and competition law. (56) Firms are more likely to be influenced by taxation and government procurement policies, subsidies and tariff barriers. (57) In respect of legal structures, firms are more concerned with property laws and labour market regulations. (58) Although merger law is important in attracting some types of investment, competition rules dealing with market conduct are generally too broad in their scope and uncertain in their outcomes to be a central determinant of investment strategies. (59) For example, a lax competition regime is a double-edged sword; while it may enable the investor to engage in anti-competitive conduct, it will not protect the investor from the same conduct directed at it.
In summary, even without extraterritorial application, competition law is probably not an overly fertile field for a regulatory race to the bottom. The causal connection between the shape of competition law and foreign investment is not strong. Nevertheless, there are some marginal incentives to manipulate competition laws to attract investment. These largely vanish under the threat of extraterritorialism.
IV LIMITATIONS OF EXTRATERRITORIALISM
Applying domestic competition laws extraterritorially suffers from some important conceptual and practical limitations. First, the nature of extraterritorialism means that it lacks the capacity to solve two of the problems exposed by international anti-competitive conduct, namely, the global welfare deficit and the duplication of administrative and transaction costs. Second, and more importantly for this discussion, extraterritorialism is, in practice, often ineffective. The factors that determine the effectiveness of the extraterritorial application of domestic competition laws will be discussed at length in Part V. This part examines the conceptual limitations.
A Extraterritorialism Does Not Solve the Problem of the Global Welfare Deficit
Competition law and policy have traditionally been driven by domestic concerns. Thus, a major object of most competition regimes is to improve domestic welfare. Extraterritorialism maintains that focus. Some commentators regard the global welfare deficit that results from international anti-competitive conduct as one of the major reasons for a multilateral competition agreement. (60) It is therefore necessary to examine how the extraterritorial application of domestic competition law might affect global welfare outcomes.
1 Welfare Analysis in a Worm without Extraterritorialism
Assuming that maximisation of aggregate welfare is a key object of competition regulation, market conduct is harmful if it causes a net loss in aggregate welfare. Aggregate welfare is generally understood in this context to be the sum of consumer and producer surpluses. (61) Therefore, market conduct is harmful where the loss in consumer surplus outweighs any gain in producer surplus.
The simple model assumes a closed economy. When trade is added, welfare analysis can produce quite different results to those produced in a closed economy. The reason for this is the presence of externalities. Market activities conducted in a world where interstate trading is the norm produce benefits and costs that are experienced externally--that is, by foreigners. Generally, domestic decision-makers are not concerned with the welfare of foreigners; they are only concerned with national welfare. (62) Thus, a merger or joint venture, which in a closed economy model might be rejected on the basis that it will cause a net aggregate welfare loss, may be allowed in an open economy model because a significant proportion of the welfare losses can be externalised (shifted to foreigners). (63) Assuming that maximisation of aggregate welfare is the object of competition policy, a world of domestic competition regimes will always be sub-optimal in global terms because domestic policy makers will pursue national interests ahead of global welfare. (64) In a world without extraterritoriality, competition will tend to be under-regulated when viewed from the perspective of global welfare. (65)
2 Welfare Analysis in a World Where Extraterritorialism is the Norm
The analysis so far has ignored the fact that domestic competition rules may be applied extraterritorially. Recent studies have attempted to model the economic incentives influencing choice of competition regime in both closed and open economies. (66) Assuming that domestic decision-makers prefer local interests over foreign interests and assuming the state will seek to maximise its aggregate welfare, the choice of competition regime--weaker or stronger than that which would be chosen in a closed global economy--depends both on the pattern of a nation's trade and on its capacity to apply its laws extraterritorially. (67)
Assuming that states are able to apply their laws extraterritorially, net importing nations are likely to be interested in regulating foreign producers whose activities can have serious effects on domestic consumers (in the form of supra-competitive prices). Net importing nations, therefore, have an incentive to implement strong competition laws because the losses in consumer surplus suffered as a result of the increase in market power that accompanies weak competition law would not be offset by increases in producer surplus. Net exporting nations, on the other hand, are less likely to be concerned with consumer surplus and, therefore, will favour weak competition laws. For the net exporting nation, the increase in producer surplus flowing from weak competition laws will outweigh the losses in consumer surplus because these losses are spread among consumers worldwide. (68)
The outcome is that, in a world where extraterritoriality is the norm without an international rule to allocate jurisdiction, competition will tend to be over-regulated when measured against the optimal level of regulation required to maximise global welfare. This is the logical consequence of an extraterritorial world in which regulation must ultimately be according to the most restrictive rule. (69) Thus, while extraterritoriality will ensure that all inefficient activities will be struck down, so too will many efficient ones.
3 Welfare Analysis in a Worm Where Extraterritorialism is Practised by Some States but Not Others
Not all nations have the capacity to apply their domestic laws extraterritorially. Such capacity depends on at least two factors. First, the state must have the ability to make meaningful extraterritorial judgments. Owing to difficulties of foreign execution, (70) this will usually depend on whether the foreign targets have local assets over which judgments can be enforced. Normally, only the larger, developed economies fit this model. (71) Second, the state must have the ability to absorb any retaliatory measures. (72)
Theoretically, nations without extraterritorial capacity will tend to prefer a competition regime that is weaker than one which would optimise global welfare. The net exporting nation would do this because its preference is always for weak competition law. (73) This may partly explain Japan's traditional reluctance to apply its competition laws strictly. Despite its ostensibly strong laws, Japan is often accused of under-regulating anti-competitive conduct. (74)
The net importing nation, which, if it could apply its laws extraterritorially would select a stronger competition regime, would select a weaker regime when it cannot apply them extraterritorially. A strong competition regime could not, by definition, affect the anti-competitive conduct of foreign producers and, therefore, could not save the resulting losses in consumer surplus. But, by being applied to local producers, such a regime would make them comparatively uncompetitive. This may partially explain why developing states, even where they have apparently strong competition laws, do not enforce those laws. (75) Aside from any capacity constraints, developing states have reduced incentives to apply their competition laws vigorously.
Therefore, only net importing states that apply their competition law extraterritorially will opt for a competition policy that is more restrictive than the global optimum. The incentives for other states suggest a competition regime that is less restrictive than the global optimum.
4 Assessing the Model
The model just described purports to demonstrate that the uneven patterns of world trade, the unequal distribution of economic power and the domestic preferences of national decision-makers create quite different incentives to adopt and apply competition rules. In all cases, the outcome is sub-optimal in aggregate welfare terms when compared with a global standard, (76) Only an international agreement which ensures that global, not just domestic, effects are internalised can potentially solve the problem of these divergent incentives and deliver optimal competition regulation. (77) As long as competition law remains domestic, the result will be sub-optimal welfare outcomes.
However, demonstrating the theoretical sub-optimality of domestic institutions does not necessarily prove that new international arrangements will be any more satisfactory. Regulation pursuant to an international agreement may carry significant costs. These include: increased detection costs, as the costs of establishing global effects will be higher than establishing domestic effects; (78) increased costs in monitoring whether states are carrying out their agreed obligations; increased rent-seeking opportunities; (79) and, to the extent that any agreement requires rule unification, increased costs associated with a loss of regime diversity--especially loss of innovation opportunities. If these costs outweigh the... |
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