National Laws and International Commerce

The Problem of Extraterritoriality

Douglas E. Rosenthal, William M. Knighton

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351388863
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This Chatham House Paper, first published in 1982, examines the problem of extraterritoriality. A wide range of economic activity is subject to the laws of more than one state, yet there is little provision for resolving situations where states impose contradictory requirements. This paper is particularly concerned with four areas of difficulty: extraterritorial anti-trust enforcement; overlapping regulatory claims; economic regulation for political aims; and different approaches to adjudication.

1 Overview

The national economic systems of developed countries have an increasing number of common features. In many respects, they are also coordinating their national economic policies more fully. Nonetheless, there are important differences among them in institutions, especially legal institutions, and in regulatory objectives. These generate economic conflicts which increase with increased international interdependence.

One major area of inevitable tension is conflicting applications of economic regulatory laws and policies to influence or control the conduct of business enterprises. Since World War II, multinational corporations with two or more affiliates established under the jurisdiction of different nations, have become the most significant enterprises engaged in international commerce. The growth of multinational enterprises is paralleled by the growth in government regulation of economic activity, even in market economies – including regulation of the activity of multinationals both within and without their borders. This increases fundamentally the occasions for national economic regulations to clash, with the multinational caught in the middle.

In some areas of economic regulation, international agreements have established standards and procedures for resolving such conflicts. This is most notable with respect to certain standards for conducting international trade, international banking arrangements and the resolution of conflicts over national taxation. In a few other areas, such as many aspects of investment regulation and monetary policy, traditional diplomacy – crisis management in the presence of at least a few agreed standards and procedures – has often avoided serious conflict.

However, there is a broad zone in which no generally agreed standards or procedures exist for resolving conflicts of economic regulatory law and policy between two or more sovereign states. Within this zone, ad hoc diplomacy has not worked well. There are four types of economic regulatory conflict with which we are particularly concerned. These are: (1) conflicts of extraterritorial antitrust enforcement; (2) conflicts over forms of national economic regulation, other than antitrust, where there is a broader international agreement that the regulation in question is legitimate, but still the potential for political conflict; (3) economic regulations applied extraterritorially in pursuit of political or foreign policy objectives; and (4) different approaches to the adjudication of legal disputes in different developed countries. These are neither watertight nor mutually exclusive categories. As we will try to show, they nonetheless provide a useful analytical framework which helps to organize and focus a complex and technical subject. Each tends to pose somewhat different issues and requires somewhat different possible solutions.

Aggressive enforcement by officials and private persons of the United States antitrust law falls into the first of these categories. Over the past 40 years, US antitrust enforcement has repeatedly conflicted with the economic regulatory laws and policies of many, if not most, of the other developed countries. The developed nations of the free world generally seek the more efficient allocation of resources, in most economic sectors, through laws and policies which promote competition among producers for the benefit of consumers. Nevertheless, each nation applies different competition (antitrust) standards in different ways. For example, in Britain, antitrust remedies are civil and prospective; in the European Community, antitrust remedies are civil but may include stiff fines for past misconduct; while, in Canada and the United States, the antitrust laws may be enforced criminally – individuals sometimes going to jail in the United States for participating in price-fixing conspiracies – although no individual has yet gone to jail under the Canadian antitrust law.

Furthermore, each nation partially exempts several economic sectors from ‘unbridled’ competition. While farmers, trade unions, exports, and depressed industries (crisis cartels) are at least partially exempt from competition laws in every developed country, many nations disagree about when and how these exemptions should be applied, and what other sectors should be permitted to engage in private regulatory arrangements in pursuit of objectives other than the promotion of competition. Among the other important goals which can outweigh the promotion of competition in particular circumstances, in any country, are the conservation of scarce natural resources, the maintenance of jobs, the protection of industries perceived to be vital to national security interests, and the promotion of export opportunities.

The essential feature of most antitrust conflicts is that US authorities seek to control foreign conduct based on the adverse effect which that conduct, unregulated, would have on competition in US domestic markets. This is commonly referred to as the legal doctrine of effects jurisdiction. Perhaps the most famous application of the effects doctrine was made by a US court in 1945 in the Alcoa case (United States v. Aluminum Co. of America, 148 F.2d 416 (2d Cir. 1945)). There, US antitrust law was applied to a British and a Canadian, as well as an American, aluminium producer to break up an arrangement among them to allocate and restrict worldwide aluminium markets – including the US market.

For half a century, until a decade after the Alcoa case was decided, the United States was virtually alone in promoting the effects doctrine as a valid basis for claiming the right to apply its antitrust law to regulate conduct beyond its border. Virtually every other developed nation was in opposition. The traditional principle of economic regulatory jurisdiction, accepted by most developed nations, is the principle of territoriality. According to this principle, a nation may generally regulate the conduct of foreigners only within its territorial boundaries. If it finds it is being harmed by conduct abroad, its proper recourse is bilateral diplomatic negotiation between governments, action under multilateral agreements and treaties, such as the General Agreement on Tariffs and Trade (GATT) or the pursuit of new treaties, bilateral or multilateral. Such conduct is not, in this view, appropriately dealt with by the unilateral action of one nation under its own laws and before its own courts.

More recently, some other authorities have begun to apply the effects doctrine under their national competition laws. This has occurred most notably in antitrust enforcement by the Commission of the European Community, under the Rome Treaty, and in enforcement under the antitrust law of the Federal Republic of Germany. Nonetheless, so far, these departures from territoriality have been modest and cautious.

As will be developed more fully in Chapter 2, antitrust conflicts have some distinctive qualities. Today, it is the private right of action which presents the greatest source of international tension in international antitrust disputes. The United States is the only nation in which private citizens take advantage of the opportunities to start private antitrust enforcement cases. It is possible that in the future other antitrust laws will begin to be employed more aggressively in this way by private parties. The Japanese antitrust law, and, potentially, enforcement of the antitrust provisions of the Rome Treaty in the national courts of the EC member states, may provide for such a development.

The second type of regulatory conflict involves non-antitrust issues. Nations regulate, to greater or lesser degree, a wide range of other corporate and commercial conduct with respect to their domestic markets. But as commercial conduct increasingly takes place in more than one state, regulation of some of it has an impact on the rest. And two nations which accept the territoriality doctrine may have conflicting laws and policies regulating, for example, an international shipping company with vessels which move between ports in both.

As national economies have become increasingly interdependent, as business enterprises have become increasingly multinational, and as technological advances have permitted dramatically more rapid and accurate international communications, it is easier for individuals and enterprises to avoid the application of any one nation’s economic laws and more difficult for any one nation to regulate conduct which may have a substantial adverse impact upon its national policies and interests. This type of regulatory conflict results not only from the increasing pervasiveness and complexity of the multinational enterprise, but from the increasing complexity of international transactions themselves. This can perhaps best be seen in considering an essentially private international law dispute – such as can arise when an international commercial airliner crashes. There may be more than a half-dozen nations with an interest in regulating the legal claims arising from the tragedy. The passengers may have been citizens of several different nations. The plane, with a possible mechanical defect, may have been manufactured by another. Potentially defective components may have been manufactured yet elsewhere. The plane may have crashed and caused injury and damage in none of these. The pilot and crew may be nationals trained under the laws of yet a different state, and there may be an issue of negligent error by an air traffic controller somewhere else entirely. Whose law applies? Whose courts should adjudicate? How are fundamental differences in the laws and legal institutions of a multiplicity of concerned nations to be resolved when the question of whose law is applied by whom can affect conclusively the rights of the disputants?

In Chapter 3, we have selected six non-antitrust areas of essentially domestically oriented economic regulation in which extraterritorial conflicts may arise. These are: taxation, banking, companies and their securities, commodity markets, international civil aviation, and international shipping. For a variety of reasons, conflicts in these areas have not up to now been as severe as in antitrust. However, from time to time, issues in these areas may rise to the level of significant diplomatic controversy. For example, US securities law, like US antitrust law, confers a private right of action to seek damages for alleged injuries resulting from misconduct abroad. It may be invoked in connection with the issuance of securities of a foreign corporation, thinly traded in US markets. There have been a few relatively minor conflicts arising out of such claims in the past. A major future conflict could develop, for example, if a US court found illegal, foreign conduct which had been specifically reviewed and approved by a foreign regulatory authority.

There are probably a dozen or more additional areas of economic regulation that we do not consider, which have in the past caused, and will no doubt in the future cause, conflicts of extraterritoriality. This is an important reason why extraterritoriality should be seen increasingly as a generic problem. It is not limited to any one area of regulation.

The third type of extraterritoriality issue arises from the explicit attempt by one nation, through the exercise of its economic regulatory power, to modify the political actions of another. Where that nation applies its regulations unilaterally with extraterritorial effect, whether avowedly to prevent evasion or deliberately to widen the effect of the action, other nations and their businesses are drawn into political conflict and industrial loss without choosing this. This is the focus of Chapter 4. Examples of this type of regulation were given in the Preface: the Soviet pipeline and the Fruehauf cases. All nations use such economic controls in time of war; most developed nations use them with respect to military weapons and strategic materials in time of peace. The United States, once again, is relatively unusual in its aggressive use of these regulations as regards non-strategic goods in time of peace and in its extraterritorial application of them.

Among the extraterritorial regulations used for political purposes by the United States are (1) export controls, especially embargoes and boycotts; (2) controls over dollar assets held by foreign banks, and currency assets held by foreign branches of American banks; (3) unilateral controls to improve foreign practices, such as US foreign anti-bribery legislation, and US Arab boycott regulations, which seek to limit the effectiveness of the Arab League boycott of Israel; and (4) foreign transaction control regulations. All these are designed to prevent certain foreign business activity by foreign enterprises, either because an American is in a control position in the foreign enterprise, or because that enterprise has received American technology or American components which it is incorporating into its products.

One of the most contentious aspects of such political controls is that they often are enforced according to a notion that foreign subsidiaries of domestic parent enterprises are subject to US jurisdiction as US nationals. If foreign subsidiaries, chartered under the laws of a foreign sovereign, are nationals of the nation of a parent enterprise, from the fact of being controlled by that parent , the opportunities for sovereign conflict are substantially increased. While in part a problem of international complexity, two states seeking to regulate conduct partially within and partially without their territories, it should also be viewed as a direct challenge to the sovereignty of the nation which charters the subsidiary.

Conflict is potentially present whenever there is an extraterritorial assertion of jurisdiction over corporate nationals. One serious example involved the US government’s freezing of Iranian dollar assets in the European branches of American banks, concurrently with the freezing of all Iranian assets in the American branches of American banks, after US Embassy personnel were taken hostage in Tehran. European governments, although sympathetic to the US reaction, were unwilling to impose a domestic freeze on Iranian dollar assets. Those governments were extremely concerned about the implications of the US action for the sanctity of banking contracts made under law and therefore for the financial system generally. They were, however, moderate in public criticism, in recognition of the extent of the provocation, as well as of some moderation of the US assertion of extraterritorial jurisdiction: the United States might have, but did not, try to freeze the dollar holdings of Iranian depositors in European banks and backed down from trying to freeze the non-dollar holdings of Iranians in the European branches of US banks. These governments also delayed in responding to Iranian pressure to unfreeze the assets until the release of the hostages had been successfully negotiated. If continued for a much longer period, the freeze would probably have been nullified in then pending legal challenges in European courts (Carswell, 1982).

The fourth broad type of extraterritoriality issue involves different approaches to legal adjudication between developed countries. This is considered in Chapter 5. Here, too, the problem up to now has been primarily between the United States, on the one hand, and all other developed countries, on the other.

It is a keystone of the American ideology that the United States has a ‘government of laws not of men’. While an Englishman, Sir William Jones, observed, ‘My opinion is, that power should always be distrusted, in whatever hands it is placed’, it is Americans more than Europeans who have embraced the thought. Suspicion of those with political authority, and suspicion of those with economic power, both pervasive in America, encourage legal rather than administrative regulation, encourage the feeling that the good faith and proper exercise of discretionary power by bureaucrats and businessmen cannot be assumed. This means that American regulations frequently limit the discretion of executive decision-makers – even on questions of US foreign economic policy. Issues which diplomats in other nations have the authority to address can, in the United States, be finally resolved only by judges in the federal court system. The American system of checks and balances is of fundamental importance. The judiciary is a branch of government coequal in power and status with the executive and legislative branches.

This unique judicial role has led to the development of an expansive set of US legal powers which law enforcers, private litigants and judges can employ to seek to control the conduct of foreign persons abroad. These powers include: (1) a broad right to compel the production of information by subpoena from parties residing abroad; (2) a wide range of information which may be demanded under law; (3) a broad scope of judicial responsibility for determining when foreign conduct regulated by foreign sovereigns may, notwithstanding foreign sovereign interests, be subject to review, limitation, cancellation and even punishment by a US court; (4) the conferring of extensive rights on private persons to seek and obtain significant money damages for ‘injuries’ which other developed nations consider matters of public international law conferring no private right to relief; and (5) the setting of a very low threshold for establishing jurisdiction over foreign persons, based on whether or not they transact virtually any business or any aspect of any business in the United States – such as contracting with sales agents and placing advertisements in American journals.

The broad scope and aggressive use of these legal instruments are perceived by other developed nations as a threat to their sovereignty – to their ability to regulate, effectively, economic activity within their own territory. They are also perceived as disruptive to the traditional process of dispute resolution by diplomacy. Diplomacy, it is felt, is usually facilitated by confidentiality and clear lines of responsibility. The dispersal of power which results from the American system of checks and balances, and from mistrust of the low visibility of executive branch discretion, is seen as weakening the reliability of the US government as a political partner.

The term extraterritoriality is itself controversial and imprecise. It implies that the only legitimate basis for a country to assert the right to control foreign conduct is the principle of territoriality. However, even nations which generally adhere to the principle of territoriality sometimes seek to regulate, by legal actions, conduct abroad, usually by their own citizens but occasionally by foreigners. Moreover, since the territoriality principle is not accepted in the United States, nor by some experts or officials in some other nations, as the only valid basis for asserting jurisdiction over foreign persons abroad, it is thought by some that the term is biased and best disregarded. We choose to retain it because it is so well established.

Why has the United States developed such an aggressive approach to extraterritorial enforcement while Britain and several other nations have not? One reason is that foreign trade has not, traditionally, been a significant component of gross national product in the US economy, while it has been in Britain. If your primary concern is the regulation of your internal market and you are not particularly dependent upon foreign trade, you need be less concerned about the negative effects that expansive regulation will have on your own economy or on the reactions of other nations. As a corollary, the wealthier and more powerful you are, the more difficult it is for others to resist your actions. Power, and satisfaction in its exercise, explains much. US extraterritoriality increased as the United States became an international power, and as European nations were especially dependent upon the United States for economic assistance – during the 1940s and early 1950s. (When Britain was at the high-water mark of its power, at the beginning of this century, a relatively uniform body of British law applied throughout the British Empire. It was largely unnecessary to impose British regulations on non-British subjects.) But today the United States is becoming more dependent on...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Preface
• 1 Overview
• 2 The effects doctrine and antitrust law
• 3 Overlapping claims to regulate multi-state transactions
• 4 Economic regulation for political aims
• 5 Adjudication in the courts of one nation
• 6 Conclusions
• References