Saturday, 16 May 2009

Blast from the Past Case Summary

American Banana Co. v United Fruit Co. 213 US 347 (1909)

The “Blast from the Past Case Summary” is a new feature for this blog. I would like to feature interesting and remarkable cases that are sometimes overlooked in antitrust and consumer protection law textbooks.

The first case in this series is American Banana Co. v United Fruit Co. which was decided by the US Supreme Court at the turn of the century with the legendary Justice Oliver Wendell Holmes delivering the Court’s judgment. I found the most striking aspect of this case to be the extreme lengths which United Fruit Company went to try to sabotage their competitor, American Banana.

Facts: The plaintiff, American Banana Company (American), alleged that prior to setting up its own company, the plaintiff, United Fruit Company (United) had engaged in a concerted scheme to monopolise the US banana trade. American alleged that United had acquired a number of its major competitors with the aim of reducing competition. United was also accused of entering into restrictive agreements with its remaining competitors to regulate the quantity of bananas to be purchased and the price to be paid. United set up a selling company with its competitors which fixed the prices of all bananas sold by the combining parties.

In 1903, a person called McConnell set up a banana plantation in Panama which at that time was part of the United States of Columbia. He also started building a railway to facilitate the export of his bananas. After setting up his plantation, McConnell was approached by United and advised that he had to either enter into a restrictive agreement with United or cease his business. McConnell refused.

Two months later, at the alleged instigation of United, the Governor of Panama recommended to his government that the territory through which McConnell’s railroad was to run be transferred to the administration of Costa Rica. This recommendation was accepted by the government of Panama. Subsequently, United and the government of Costa Rica started to interfere with McConnell’s operations.

In June 1904 (after a civil war in which Panama revolted and become an independent state), American acquired McConnell’s business and continued with the construction work. However, in July, United persuaded Costa Rica soldiers and officials to seize part of the American plantation and part of its banana inventory. Construction and operation of American’s plantation and railway also ceased.

In August 1904, a person called Astua took ex-parte proceedings in a Costa Rica court claiming he was the lawful owner of the American banana plantation. It would appear that Astua took this action at the instigation of United. Astua obtained judgment that he was the owner of the American plantation. Subsequently, representatives of United bought the American plantation from Astua.

United approached the government of Costa Rica to ask them to withdraw their soldiers from the plantation. Unfortunately, for United, the government of Costa Rica did not withdraw its soldiers and remained in possession of the plantation.

American took action seeking treble damages for a breach of section 1 of the Sherman Act against United and the government of Costa Rica.

Issues: Does the Sherman Act apply to the acts of United towards American banana interests in Panama and Costa Rica? Could the acts of the governments of Panama and Costa Rica be subject to an anti-trust suit under the Sherman Act?

Decision: The US Supreme Court decided that the Sherman Act did not apply to the acts of United towards American in Panama and Costa Rica. In his judgment, Justice Holmes stated:

For another jurisdiction, if it should happen to lay hold of the actor, to treat him according to its own notions rather than those of the place where he did the acts, not only would be unjust, but would be an interference with the authority of another sovereign, contrary to the comity of nations, which the other state concerned justly might resent.

It is apparent that this statement of principle by Justice Holmes no longer represents good law as far as the extraterritorial reach of US antitrust laws is concerned. It is now well established that US antitrust laws do have extraterritorial application based on whether the relevant overseas conduct has an effect on US commerce. This “effect” test for determining jurisdiction was first formulated in United States v Aluminium Company of America (ALCOA) 148 F 2d 416 (2nd Cir., 1945).

Justice Holmes also denied American’s claims against the government of Costa Rice on the following basis – 

The fundamental reason why persuading a sovereign power to do this or that cannot be a tort is not that the sovereign cannot be joined as a defendant or because it must be assumed to be acting lawfully...The fundamental reason is that it is a contradiction in terms to say that, within its jurisdiction, it is unlawful to persuade a sovereign power to bring about a result that it declares by its conduct to be desirable and proper. It does not, and foreign courts cannot, admit that the influences were improper or the results bad. It makes the persuasion lawful by its own act. The very meaning of sovereignty is that the decree of the sovereign makes law.
In other words, an antitrust action directed against the acts of a sovereign cannot be successful, as the acts of the sovereign, within its jurisdiction, cannot be held to be unlawful. Whenever a sovereign acts to pass a law or achieve some other result, these acts are lawful if done within the sovereign’s jurisdiction.

Justice Holmes may have stated the rule concerning the lawfulness of sovereign acts too broadly. In many jurisdictions, a sovereign’s power is subject to the limitations contained in its Constitution. Sovereign power may also be limited by external laws and treaties which the sovereign has voluntarily agreed to be bound by, such as United Nations conventions and international courts. However, in these circumstances the sovereign also retains the power to free itself from these external limitations if it so chooses.

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