Extraterritorial Application of Competition Law

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Ephraim Musiba

Author – Ephraim Musiba

Ephraim Musiba is currently in the process of completing his studies towards a Postgraduate Diploma in Legal Practice at the Law School of Tanzania. He holds a Master of Laws (LL.M) degree in International Trade Law from the University of Cape Town. His previous professional experience includes working for Japan Tobacco International – Tanzania as a Retail Development Coordinator in the Consumer and Trade Marketing department. Also while attending law school, he has taken on varied intern positions with the Judiciary; as well as international law firms inclusive of Clyde & Co. Tanzania. Ephraim’s key areas of interest are international trade and development; competition law; international economic law; regional integration; and intellectual property.

 


 

ARTICLE

 

The question of the extraterritorial application of competition law has been a subject of debate and controversy for many years. Under public international law it is generally accepted that a state may make laws that affect the activities that take place within its territory (the territoriality principle) as well as having the power to regulate the behaviour of its citizens outside its territory (the nationality principle). Within the last decades, the scope of the territoriality principle has been widened significantly, such that it now gives a state the power to exercise jurisdiction over not only activities that arise within its territory but also activities that arise from a foreign country that are completed within its territory (objective territoriality).

 

The application of the objective territoriality principle has been heavily criticised by different academicians and commentators. The point of criticism is based on the question of whether it is legitimate under economic law to apply the objective territoriality principle to the effects of an agreement entered in another state or an anticompetitive activity conducted in another state.345 This is because the application of this principle is likely to result in clashes between the different interests of countries and businesses with those of other nationalities. These clashes are then likely to jeopardise diplomatic relations between the countries involved.

 

On the other hand, there are those commentators who believe that applying competition law extraterritorially is a necessary evil. This is because research has shown that cross-border restrictive trade practices involving mergers, cartels and abuses of dominance have the potential to distort trade to the advantage of the perpetrators, eliminate weaker domestic trading partners, stifle entrepreneurship, and ultimately retard economic development. They greatly affect the flow of trade and they hinder the benefits that could come from trade liberalisation and open markets. To avoid the negative effects of these mergers and abuses of dominance it is necessary for a competition law to have an extraterritorial reach. Anticompetitive practices need to be countered at a global level. An example can be drawn from a 1997 report by Levenstein and Suslow who reported that the value of ‘cartel-affected’ imports to developing countries was estimated at US $51.1 billion, an amount which was said to be higher than the amount of US $39.4 billion in foreign aid given to developing countries at the time. These figures raise an alarm as to how anticompetitive activities, even if conducted elsewhere, can actually negatively impact domestic markets.

 

Moreover, there have also been issues arising from cross-border mergers which, if not critically reviewed, could result in reducing competitiveness. For example, if two transnational companies merge and resulting from the merger this new company ends up possessing excessive market power, this could then have very dire consequences for developing countries. This is because markets in developing countries are usually small, underdeveloped and less competitive, so this merged firm is likely to result in product-monopoly in such a market.

 

As a result of all these issues, protecting local consumers, industries and businesses from anticompetitive activities that take place overseas has become a priority for many countries, especially if they have underdeveloped economies such as Tanzania. This protection of domestic markets from activities in foreign countries makes extraterritorial application of domestic competition laws an internationally legitimate policy. For that reason, it is imperative from a developmental perspective for the competition laws of developing countries such as Tanzania to have an extraterritorial reach.

 

The competition regime in Tanzania is governed by the Fair Competition Act, 2003 (FCA). The scope of the FCA’s extraterritorial application is broad. It applies, not only to nationals and residents, but also to non-nationals and non-residents. Nevertheless, up until now Tanzania has not dealt with any matter that has required her to apply her competition law extraterritorially, so no jurisprudence on this issue has been developed as yet. But if such a matter does ever arise it would be very interesting to see how the Tanzanian Fair Competition Commission (FCC) would approach it in the light of the existing body of Tanzanian jurisprudence dealing with competition law and policy.

 

In my opinion, an appropriate approach for the FCC to follow in applying the Fair Competition Act extraterritorially is to apply the effects doctrine. The effects doctrine is a jurisdictional theory developed by the US antitrust authorities. The essence of this doctrine is that it permits competition authorities to exercise jurisdiction over foreign persons and their foreign conduct if as a result of their conduct there are economic effects experienced on the domestic market. It emerged in 1945 when it was applied in the famous case of United States v Aluminium Co. of America (Alcoa) et al. In this case, the US government brought a suit against Alcoa a US aluminium manufacturer for contravening the Sherman Act. Alcoa in collaboration with its subsidiary Canadian company entered into a cartel agreement with other European aluminium manufacturers to control and monopolise the aluminium market. The activities of this cartel took place altogether outside of the US and on that fact, Alcoa contended that the matter was outside US’ jurisdiction. The court however stated 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’. Hence, the court found the agreement in dispute to be ‘unlawful though made abroad’, as it ‘intended to affect imports and did affect them’.

 

Then again there are critics who have disapproved the effects doctrine claiming that it results in an excess of jurisdiction of one country over the affairs of others under public international law. But I believe, that from the standpoint of a developing country, the application of the effects doctrine is justifiable. The competition authorities of Tanzania could possibly learn from South Africa on how to apply its competition law extraterritorially as South Africa did in the case of American Natural Soda Ash Corporation (ANSAC) and Another v Competition Commission and Others.

 

In the ANSAC case the South African competition authorities followed the effects doctrine when they enforced their competition law extraterritorially on a US company. In this case ANSAC a US corporation (made up of five US soda ash producers) that exports soda ash from the United States to other countries including South Africa, was accused of violating South African Competition Act 89 of 1998. ANSAC is in fact a cartel but it is considered to be legal in the US since it is an export-directed cartel and such cartels are exempted under the Sherman Act. The complaint against ANSAC was brought by Botash (a Botswanian producer of soda ash), that accused ANSAC of engaging in restrictive horizontal practices and thus violating the Competition Act. ANSAC however argued that its activities did not have negative or deleterious effect within South Africa hence s 3(1) of the South African Competition Act which states that the Act is applicable to ‘all economic activity within, or having an effect within, the Republic’ does not apply to it.

 

In arriving at its decision, the matter for determination as far as the Competition Appeal Court (CAC) was concerned was not whether the consequences of ANSAC’s conduct were criminal or anticompetitive, but whether the conduct complained of had ‘direct and foreseeable’ substantial consequences within the regulating country, ie, South Africa. Therefore the ‘effects’ had to be such that they fell within this regulatory framework of the Act, whether anticompetitive or not.

 

On appeal the Supreme Appeal Court concurred with CAC’s decision and in their closing they agreed that the exercise of jurisdiction should not involve a consideration of the positive or negative effects on competition in the regulating country but merely whether there were sufficient jurisdictional links between the conduct and the consequences.

 

Thence, I think that this jurisprudence applied by the South African competition authorities on matters of extraterritorial application of competition law is relatively desirable as it gives the competition institutions greater scope to fully exercise their power in order to ensure that competition is regulated in the most effective way possible. This is an approach that Tanzania should take cognisance of so that if a matter relating to the extraterritorial application of its Competition Act comes before the FCC it will be armed with an appropriate precedent to follow.