14 July 2021
Willard Mwemba
In summary
This article highlights the nature of jurisdiction vested upon selected national competition authorities and the limitations on the jurisdiction vested upon them. It explores the various theories and case law that have arisen in various regions in respect of the extraterritorial application of competition laws. It advocates for regional laws as the solution to addressing the challenges and the limitations of extraterritorial application of national competition laws.
Introduction
Globalisation has redefined the way in which businesses operate and how consumers behave. Technological advancement coupled with easy internet access have spurred a new economic landscape in which markets are increasingly shifting to online platforms and the differing geographic location of the customer and the supplier is no longer a hindrance to the conclusion of commercial deals. The loosening of national borders coupled with technology and easily accessible logistics have eased cross-border trade and, simultaneously, increased consumer welfare across countries. Businesses either physically or effectively operate in more than one jurisdiction.
The downside of increased international trade is that anti-competitive practices can be easily exported. Similarly, the effects of mergers can be cross-border. The effects of anti-competitive conduct and lessening of competition from mergers can, thus, be felt in an economy even if the economic operators are not physically present in a particular country.
As a general rule, account is taken of the principle of sovereignty, which states that a country legislates to govern matters within its territory. National laws are, therefore, crafted to embody the principle of territoriality;[1] in other words, their scope of application extends only to conduct within the state and cannot be extended to international conduct.
Competition legislation is no exception. Notwithstanding, modern national competition laws embody the ‘effects doctrine’ such that it can be enforced against anticompetitive practices and mergers that lessen competition and have an effect in the reviewing jurisdiction, irrespective of their origin.
Although a competition agency, where the applicable law allows, can investigate anti-competitive business practices or mergers that result in a substantial lessening of competition and have an effect within its borders, the enforcement of the extraterritorial scope of national competition laws is not without challenges. Lack of enforcement capacity, lack of capacity to enforce remedies on parties not physically present in the jurisdiction, international comity, different procedural requirements, different substantive national competition laws and confidentiality obligations barring information sharing across competition enforcers are the main challenges that limit the successful extraterritorial enforcement of national legislation.
To address the challenges, supranational competition laws can be an effective solution to combat cross-border anticompetitive practices and mergers. The EU competition model and the Common Market for Eastern and Southern Africa (COMESA) competition model have been successful in filling in the gap of national competition laws dealing with cross-border anticompetitive practices. With the support of cases that have been decided, the aim of this paper is to critically evaluate how regional competition laws have successfully combatted cross-border anticompetitive practices and cross-border mergers while highlighting where and why national competition laws have failed to do so.
The paper is structured as follows: the first part expounds on the extraterritorial application of national competition law, including its limitations, and the second part highlights how the enforcement of regional law has filled in the enforcement gaps.
Can national competition law be stretched to capture cross-border competitive conduct?
A state is sovereign to regulate any matter within its territory. In the case of France v Turkey,[2] commonly referred to as the Lotus case, the International Court of Justice held that ‘jurisdiction is certainly territorial; it cannot be exercised by a State outside its territory except by virtue of a permissive rule derived from international custom or from a convention.’ [3]
Extraterritoriality refers to the ability of a country to apply its domestic laws to either non-nationals and residents or to foreign conduct that has an effect within its territory. The principle of extraterritoriality was expounded by the International Court of Justice as follows:[4]
[f]ar from laying down a general prohibition to the effect that States may not extend the application of their laws and the jurisdiction of their courts to persons, property and acts outside their territory, it leaves them in this respect a wide measure of discretion, which is only limited in certain cases by prohibitive rules; as regards other cases, every State remains free to adopt the principles which it regards as best and most suitable.
In the realm of competition law enforcement, the method relied on by countries to achieve extraterritoriality differs. The United States established the effects doctrine as far back as 1945, in the case of United States v Aluminum Co of America et al,[5] to apply its domestic laws to conduct not originating within its territory but affecting its markets. The case involved Aluminum Co of America, which had entered into an international aluminium cartel with non-US manufacturers of aluminium. Aluminum Co of America and the foreign manufacturers were suspected of having breached the Sherman Act of 1890.
Citing its previously decided cases, the US Court of Appeals held that ‘it is settled law . . . that any state may impose liabilities, even upon persons not within its allegiance, for conduct outside its borders that has consequences within its borders which the state reprehends; and these liabilities other states will ordinarily recognize”. The Court held that the foreign defendants intended, through their conduct, to affect imports within the United states and that those imports were, in effect, affected. Relying on the effects doctrine, 90 per cent of the cartel infringements fined by US competition agencies have been international cartels.[6]
Compared with the US, the European Commission has not been absolute in its interpretation in respect of whether its legislative framework governing competition is extraterritorial. The approach of the European Union has been to use the single economic unit and implementation doctrines to capture foreign conduct in breach of its competition laws.
When called to determine whether a non-EU national had breached its competition rules in Imperial Chemical Industries Ltd v Commission of the European Communities,[7] the European Union used the single economic unit theory to hold that a parent company and its subsidiary companies form a single enterprise. Although Imperial Chemical Industries Ltd was not an EU national, it had subsidiaries operating within the European Union. The European Commission held that:
where an undertaking established in a third country, in the exercise of its power to control its subsidiaries established within the community, orders them to carry out a decision to raise prices, the uniform implementation of which together with other undertakings constitutes a practice prohibited under Article 85(1), now referred to as Art 101(1), of the Treaty on the Functioning of the European Union, the conduct of the subsidiaries must be imputed to the parent company.
In a later case that did not involve EU nationals, [8] the European Commission relied on the implementation doctrine to fine wood pulp producers located outside the European Union that had entered into a price-fixing cartel for the export prices of their products into the European Union. It has been suggested that the implementation doctrine is akin to the US effects doctrine.[9]
The effects doctrine has also been applied in the European Union in the Intel case.[10] In this case, the European Court of Justice ‘clarified that a qualified effects test provides a suitable means to establish EU jurisdiction for the application of the competition provisions’.[11]
By way of background, the Intel case involved two companies: one based in the United States and the other in China. The point of contention was in respect of the contractual terms imposed by Intel, which was based in the United States, to Lenovo, which was based in China. Intel sought to lock out of the market Lenovo notebook products in which central processing units (CPUs) of a company called Advanced Micro Devices Inc had been installed. Advanced Micro Devices Inc was a competitor to Intel, and Lenovo was a customer of both companies.
Despite there being no direct substantial connection to the European Union, the European Union was of the view that the conduct that was said to constitute abuse in this case (loyalty rebates and compensation payments directed at locking out Lenovo devices that were fitted with CPUs from Advanced Micro Devices) were part of Intel’s overall strategy and, thus, was likely to affect the EU market.
The national competition laws of countries such as Australia,[12] Germany[13] and China[14] confer explicit extraterritorial jurisdiction. Recent adopters of competition law, including developing countries, have also included explicit provisions in their respective pieces of legislation to provide for extraterritorial scope.[15] For instance, section 3(2) of the Competition Act 2007 of Mauritius explicitly provides that ‘this Act shall apply to every economic activity within, or having an effect within, Mauritius or a part of Mauritius.’
Similarly, section 3(1) of the Competition and Consumer Protection Act 2010 of Zambia provides that ‘this Act applies to all economic activity within, or having an effect within, Zambia.’ Section 3(1) of the Competition Act 2007 of Eswatini provides that ‘[t]his Act applies to all economic activity within the country or having an effect in the country.’ Section 6 of the Competition Act 2010 of Kenya confers explicit extraterritorial jurisdiction to conduct outside Kenya.
While extraterritoriality may have been entrenched in national competition legislation and methods have been devised to stretch the territorial reach of competition laws such as in the United States and the European Union, its enforcement in practice is not without challenges.
Challenges in the extraterritorial application of national competition laws
The challenges presented by the application of national competition laws to conduct beyond the borders of a particular nation have remained unresolved, even in the wake of globalisation and the creation of seamless markets.
The extraterritorial application of national competition laws of developed countries
The United States was the first to develop a doctrine for supporting the application of extraterritoriality through ‘an effects approach’. The European Union followed suit by developing two other doctrines – the single economic doctrine and the implementation doctrine – to support extraterritorial application of competition laws.
The application of national competition laws outside borders has, at times, been received with mixed reactions where the countries view that the application of the same infringes on their jurisdiction and is an assault on their sovereignty. One example is the Thermal Fax Paper case[16] in which Japan objected to the ‘extraterritorial application of the criminal provisions of U.S. competition laws against conduct by foreign companies outside the U.S’.[17] On the other hand, in the Vitamin cartel case,[18] Japan, Germany and Canada objected to the application of damages in the US Antitrust Law to acts in foreign countries and stated that it was an infringement of national sovereignty.[19]
The extraterritorial application of national competition laws of developing countries
The challenges are more pertinent for competition agencies in developing countries. Despite having the legislative might, competition agencies of developing countries, especially on the African continent, may lack the enforcement capacity to combat cross-border anticompetitive practices.
In this vein, despite having the legislative framework, no international anticompetitive conduct has been tried and fined to date by most, if not all, competition agencies in developing countries in COMESA. Anecdotal evidence seems to suggest that the same is true for competition authorities in developing countries elsewhere.
Several reasons may account for this. Lack of information on anticompetitive practices may be one reason. The operators, which are often large multinational companies have the ability to orchestrate their activities intelligently to leave no trail for an agency to suspect anticompetitive practice is at play.
It has been highlighted that one way of preventing and discouraging multinational firms from engaging in anticompetitive practices is to block market access to them.[20] However, this may not be an option for developing countries for two main reasons: the multinational firms represent a source of foreign direct investment for them; or the revenue they represent in the multinational operator’s figures is too small to have the leverage to make blocking market access a credible and effective threat.
Another challenge that lies in the way of extraterritorial application of domestic competition law is the lack of capacity to enforce remedies on parties that are not physically present in the territory. This challenge is more pertinent to developing countries. Although the agency may impose remedies on those operators, the enforcement of those remedies is not always easy. The willingness of the economic operator to abide by the remedy imposed depends directly on its economic interest in terms of the share of the turnover that is generated from its operations in the jurisdiction. It is often observed that international operators do not have significant operations in developing country markets. The costs of abiding by those remedies often outweigh the benefits of ceasing operations in those economies altogether.
Another reason is the lack of financial capacity and competent staff to pursue potential international anticompetitive practices and successfully combat them. To successfully pursue international anticompetitive practices, strong financial capacity and skilled staff are required.
This is especially challenging for competition agencies of developing countries. Competition agencies are mostly funded by public expenditure, and the funding of competition agencies usually ranks lower in terms of priorities than other pressing issues, such as public health, education and infrastructural development. The already limited budget allocated to competition agencies has to be used sparingly by the competition agency, which leaves insufficient resources to invest in the training of staff to identify potential international competition law infringements affecting domestic markets.
Another reason that may hinder the effective extraterritorial application of competition law is international comity and a reluctance to engage in jurisdictional conflict, especially with major trading partners. Countries may prefer to defer jurisdiction to the country where the anticompetitive practice is occurring in the interests of ‘positive comity’[21] and suspend the extraterritorial application of their laws to such conduct.
Differing substantive national competition laws may also be a challenge that restricts extraterritorial application of competition law. Although three main pillars of competition law enforcement are universally acknowledged (ie, cartels, abuse of dominance and mergers that lessen competition substantially), national competition laws differ substantially when it comes to the key aspects of their respective substantive provisions.
Resale price maintenance, for instance, can be assessed under the rule of reason approach or under a per se approach.[22] Certain jurisdictions allow parties to apply for exemptions for otherwise collusive agreements under specific conditions whereas others do not.[23] The different substantive competition law provisions may encourage economic operators that operate in more than one jurisdiction to forum shop and escape national prohibitions.
Another challenge inherent in domestic competition law legislation that inhibits effective extraterritorial application of the same is the presence of confidentiality obligations, often rigidly crafted, that prevent the sharing of information for coherent and successful enforcement across competition enforcers. Breaches of confidentiality obligations in national legislation are often accompanied by criminal sanctions, which discourage information sharing and cooperation among competition agencies – thus, inhibiting successful investigation of and enforcement against cross-border anticompetitive practices.
Criticism of the doctrines on extraterritorial application of national competition laws
There are views that have been advanced that say the effects doctrine ‘interferes with foreign sovereignty interests’ and ‘international comity concerns’.[24] The application of the effects doctrine by the European Court of Justice in the Intel case has been criticised as an application of a qualified extension of the effects doctrine in relation to ‘wholly offshore conduct that is part of the same strategy’.[25] The criticism of the European Court of Justice’s application seems to suggest that it overreached in its scope of application.
However, those in support of this move by the European Court of Justice state that the Treaty on the Functioning of the European Union (TFEU) allows for this kind of application of the Treaty by the Court and was, thus, within scope.[26] Further, owing to the developing global economy, this kind of reach is necessary to also cover activities on online platforms.
Those in support of the effects doctrine argue that it has filled the gap arising from the ‘failure by international public international principles’’ to address jurisdictional limitations and challenges.[27] Countries have developed express provisions in their laws in an effort to fill the gap created by the challenges of extraterritorial application of national competition laws.
International organisations, such as the Organisation for Economic Co-operation and Development and the International Competition Network, have carried out studies to note the areas of convergence.[28]
How regional laws have sought to address the gaps of territorial application of national competition laws
General observations
Extraterritorial application of national competition laws has its drawbacks, including:
- risk of conflict with long-established international principles that uphold the sovereignty of states;
- conflict between states that may feel threatened by the application of another state’s law in their territory; and
- challenges in the enforcement of remedies imposed on the infringing parties.
A reading of case law from the United States and the European Union points towards a consensus that where conduct has direct impacts within the territory where the competition agency is situated, then the agency has every right to take action against that conduct. The differing views arise where the enforcement against conduct is by a national competition authority outside its borders.
One of the views advanced is that competition authorities are expected to exercise restraint in the extraterritorial application of those laws in a direct manner in respect of companies located overseas.[29] The actions taken by competition authorities in an effort to seal the gap created by the need to enforce beyond borders include negotiating cooperation agreements and directing queries to foreign entities established within their borders.
Courts in various jurisdictions have made efforts to stay within the confines of international comity.
Regional cooperation
Over time, countries have joined forces to form regional competition bodies, which have been instrumental in filling the gaps in enforcement.
In their application of competition laws, EU member states are guided by the TFEU, as well as various guidelines and practice notes developed by the European Commission. The member states, in turn, use the TFEU and those documents as a benchmark in developing their own competition laws. This has gone a long way in addressing jurisdictional concerns experienced by the member states with regard to cases within the European Union and beyond as the same is addressed by the European Commission and the European Court of Justice. An example of such application is in the Imperial Chemical case. [30]
In COMESA, through article 55 of the COMESA Treaty and the COMESA Competition Regulations 2004, the member states have established the COMESA Competition Commission[31] to oversee competition in the common market and the COMESA Court of Justice to handle disputes relating to this enforcement.
In the East African Community (EAC), the Treaty for the Establishment of the East African Community and article 37 of the EAC Competition Act 2006 have established the EAC Competition Authority to oversee competition in the EAC market and the EAC Court of Justice to handle disputes relating to this enforcement. More recently, the Economic Community of West African States (ECOWAS) established a regional competition authority – the ECOWAS Regional Competition Authority – in 2019, and the African Continental Free Trade Area is making efforts to regulate competition at the African continental level.
The above African regional competition bodies[32] have also signed memoranda of understanding with national competition authorities and other regional competition authorities,[33] which will help to address the gaps in extraterritorial jurisdiction, as there will be a harmonised approach to enforcement.
Nevertheless, even with the advent of supranational competition laws, the problem is not completely resolved. The supranational competition laws only address problems of extraterritoriality in a regional economic block. The application of a regional supranational competition law outside a regional economic block would encounter similar challenges as those encountered by the application of national competition laws outside the borders of a particular country.
The solution appears to lie in the creation of a global supranational competition law. However, while this may be the desired goal, previous attempts to create some semblance of this model have lamentably failed for numerous reasons, including lack of political will, lack of consensus on a number of substantive and procedural issues, sovereignty and variable geometry.
At present, regional competition laws have resolved the concern at least within the regional economic blocks, as effectively demonstrated by the European Commission and the COMESA Competition Commission. With regard to conduct outside the regional economic blocks, the traditional tools of comity, the effects doctrine and the single economic and implementation principles will continue to apply for the foreseeable future, especially since we are living in times in which there is a lot of polarisation and resurgence of national interest – grounds inimical to reaching consensus on global matters including a global competition law.
Conclusion
This article explored the various challenges that exist for the extraterritorial application of national competition laws in respect of the principles of international comity. It also reviewed the various doctrines that have been established in the application of national competition laws and how the same has been viewed in light of international comity.
In conclusion, the article has taken cognisance of the regional and international efforts in seeking to harmonise the approach to enforcement against anticompetitive conduct across borders. In the long run, this will address anticompetitive practices on online platforms, which transcend national borders.
Notes
Source: Global Competition Review