Ninth Circuit Holds “The Act of State Doctrine” Applies to Bar Suit Alleging Antitrust Conspiracy Involving a Corporation 51% Owned by the Mexican Government and a Japanese Corporation Prevented Competitors From Entering Mexican Sea Salt Market

Ian L. Papendick and Dana L. Cook-Milligan
Winston & Strawn LLP

In Sea Breeze Salt, Inc. v. Mitsubishi Corporation, — F,3d —-, 2018 WL 3863842 (9th Cir. 2018), the Ninth Circuit affirmed the order of Judge Dolly Gee of the United States District Court for the Central District of California, holding that the act of state doctrine applied to bar antitrust conspiracy claims relating to exclusive distribution contracts concerning Mexican sea salt. The Ninth Circuit held that because defendant ESSA was 51% owned and controlled by the Mexican government, and the conduct at issue concerned the exploitation of the entirety of Mexico’s solar sea salt output, the act of state doctrine barred the plaintiffs’ lawsuit against defendant Mitsubishi Corporation, which owned 49% of ESSA and was granted the exclusive distribution rights by ESSA.

Background

Plaintiffs Innofood, S.A. de C.V., a Mexican corporation, and Sea Breeze Salt, Inc., a California corporation filed suit in the Central District of California alleging an antitrust conspiracy between defendants Exportadora de Sal, S.A. (“ESSA”), a Mexican corporation, and Mitsubishi Corporation, a Japanese entity. Mitsubishi International Corporation, a New York corporation and wholly-owned subsidiary of Mitsubishi Corporation, was also named as a defendant. Sea Breeze Salt, Inc., 2018 WL 3863842 at *1-2.

ESSA is a Mexican salt production corporation 51% owned by the Mexican government and 49% owned Mitsubishi Corp. According to the complaint, ESSA is the world’s largest producer of solar sea salt, accounting for 90% of Mexico’s salt exports and 17% of total global production of salt. Plaintiffs claimed that ESSA’s decision to sell its salt exclusively to Mitsubishi violated federal and California antitrust law. Id.

Although ESSA historically sold all of its salt to Mitsubishi, that started to change when a reformist director general took over ESSA and started entering distribution contracts with other companies. One of those contracts was a February 2014 distribution contract between ESSA and plaintiff Innofood. Id.

However, after ESSA’s director general was terminated in late 2014, ESSA refused to honor purchase orders issued by Innofood under its distribution contract with ESSA. That breach prevented Innofood from being able to fulfill its contractual obligation to sell ESSA’s salt to plaintiff Sea Breeze, which caused Sea Breeze to be unable to fulfill purchase orders in the United States. Id.

The plaintiffs asserted five claims arising from ESSA’s decision to sell its salt to Mitsubishi exclusively and refusal to honor its contracts with plaintiffs: (1) an illegal restraint of trade under Section 1 of the Sherman Act, (2) an unlawful exclusive agreement under the Clayton Act, (3) an unlawful restraint of trade under California’s Cartwright Act, (4) intentional interference with contractual relations under California law, and (5) intentional interference with prospective economic advantage under California law. Id.

The plaintiffs only served the Mitsubishi defendants—not ESSA. The Mitsubishi defendants moved to dismiss the complaint on based on the act of state doctrine, forum non conveniens, and for failure to state a claim. Judge Gee found that the action was barred by the act of state doctrine and did not reach the other arguments presented, and granted the motion to dismiss, holding that “(1) the alleged conduct constituted the official acts of a foreign sovereign within its own borders, (2) relief would require the court to declare invalid the official acts of that foreign sovereign, and (3) no exception to the act of state doctrine applied.” Id.

Because ESSA was never served with the complaint, the district court also dismissed the claims against ESSA for failure to serve, further noting that the “grounds on which the case was dismissed as to the Mitsubishi defendants would in fact apply with equal (if not greater) force to ESSA.” Id.

Plaintiffs appealed, and the Ninth Circuit, in an opinion authored by Judge Wardlaw, held that “[t]he district court correctly dismissed the action under the act of state doctrine.” Id. at *2.

The Ninth Circuit’s Analysis

The Ninth Circuit explained that “[u]nlike the Foreign Sovereign Immunities Act (“FSIA”), which is jurisdictional, the act of state doctrine is a substantive defense on the merits.” Id. at *2 (quotation marks and citations omitted). The act of state doctrine is a “consequence of the domestic separation of powers, reflecting the strong sense of the Judicial Branch that its engagement in the task of passing on the validity of foreign acts of state may hinder the conduct of foreign affairs.” Id. (quoting W.S. Kirkpatrick & Co. v. Envtl. Tectonics Corp., Int’l, 493 U.S. 400, 404 (1990)) (quotation marks omitted). Courts must thus be careful in their application of the act of state doctrine and ensure that “[e]very sovereign State is bound to respect the independence of every other sovereign State, and the courts of one country will not sit in judgment on the acts of the government of another done within its own territory.” Id. at *3 (quoting Credit Suisse v. U.S. Dist. Court, 130 F.3d 1342, 1346 (9th Cir. 1997)).

The act of state doctrine bars lawsuits when two elements are satisfied: “(1) there is an official act of a foreign sovereign performed within its own territory; and (2) the relief sought or the defense interposed [in the action would require] a court in the United States to declare invalid the [foreign sovereign’s] official act.” Id. (quoting Credit Suisse v. U.S. Dist. Court, 130 F.3d 1342, 1346 (9th Cir. 1997)).

However, there is an exception—even when the act of state doctrine’s elements are satisfied, courts may also evaluate the factors explained in Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398 (1964), to evaluate “the extent to which the policies underlying the doctrine justify its application.” Id. (quoting W.S. Kirkpatrick & Co., 493 U.S. at 409) (quotation marks omitted).

The Ninth Circuit addressed these considerations in turn:

Official Act of a Foreign Sovereign Performed Within its Territory

The Ninth Circuit considered two issues in determining whether ESSA’s actions were the official acts of a foreign sovereign: first, whether the actions of ESSA—a corporate entity and not a government agency or official—could be considered a sovereign acts; and second, whether ESSA’s alleged conduct “constitute a sovereign, official act.” Id. at*3 (emphasis added).

Even though ESSA was a corporation, and not a government agency or official, the Ninth Circuit explained that “[g]iven that a government must always act through agents, it makes no difference for act of state purposes whether that agent is an individual, an agency, or a majority-owned and controlled corporation, so long as the acts in question are official, sovereign acts.” Id.

Thus, because the Mexican government owned 51% of ESSA and appointed its chief executive and majority of its board of directors, the Ninth Circuit concluded that “ESSA’s actions, to the extent they constitute official acts, are the acts of the Mexican government.” Id. The Ninth Circuit took this opportunity to “make explicit here what was implicit in [prior decisions]: that an official act for purposes of the act of state doctrine may be performed by an instrumentality of a foreign sovereign, such as a government-owned corporation. The critical question is not the identity of the actor, but rather the nature of the act itself.” Id.

The Ninth Circuit then cited to “a long line of decisions by this and other courts of appeals [that] hold[] that a nation’s decisions about the exploitation of its own natural resources are quintessentially sovereign in nature.” Id. Indeed, the natural resource in question in this litigation—sea salt—is expressly “included within the list of natural resources that the Mexican Constitution commits to state ownership . . . .” Id. at *4.

Thus, the court concluded that the first element of the act of state doctrine was satisfied because “Mexico’s salt is a sovereign natural resource[, and] our precedent, and that of other circuits, teaches that its exploitation is therefore a sovereign act,” and because all of the conduct challenged in the complaint occurred within Mexico. Id. Accordingly, Mexico’s decision, through its instrumentality ESSA, about how to distribute its sea salt, i.e., exclusively through Mitsubishi, was an official, sovereign act. Id.

Invalidation of A Foreign Sovereign’s Official Act

The Ninth Circuit next considered whether the relief sought by the plaintiffs would require the court “to invalidate Mexico’s sovereign decisions about the exploitation of its natural resources.” Id. at *5. Looking at the plaintiffs’ five causes of action, the court found this element was satisfied because in order for plaintiffs’ claims to succeed, the court would have “to pass judgment on the lawfulness of [ESSA’s] decision” to distribute all of its salt through Mitsubishi, “thereby ‘instructing a foreign sovereign to alter its chosen means of allocating and profiting from its own valuable natural resources.’” Id. (quoting Int’l Ass’n of Machinists v. Org. of Petroleum Exporting Countries, 649 F.2d 1354, 1358 (9th Cir. 1981) (“IAM”)). “What’s more, plaintiffs seek injunctive relief, which would amount to a quite literal instruction to Mexico to alter the way it profits from its salt.” Id. at *6.

Consideration of the Sabbatino Factors

The Ninth Circuit acknowledged that under the Supreme Court’s Sabbatinodecision, even if the above factors support the application of the act of state doctrine, “courts may look to additional factors to determine whether application of the act of state doctrine is justified.” Id. at *6.

Sabbatino sets forth three factors to consider when evaluating whether the act of state doctrine is being properly applied: “[f]irst, the greater the degree of codification or consensus concerning a particular area of international law, the more appropriate it is for the judiciary to render decisions regarding it. Second, the less important the implications of an issue are for our foreign relations, the weaker the justification for exclusivity in the political branches. And finally, . . . [whether] the government which perpetuated the challenged act of state is no longer in existence.” Id. (quotation marks and citations omitted).

The Ninth Circuit found that none of these factors were present in this action. First, “there is no international consensus” condemning a sovereign’s “exploitation of its own natural resources.” Id. at *6. Second, the Ninth Circuit found that this case has “potentially important implications for our foreign relations” because of “the very nature of an action that, if successful will result in a United States court telling a foreign sovereign what to do with its own natural resources raises the ‘possibility of insult to the [foreign] state[] and of interference with the efforts of the political branches to seek favorable relations with’ that state.” Id. at *7 (quoting IAM, 649 F.2d at 1361). The court observed that this was particularly true given the “scale and importance of the resources at issue”—ESSA produces 90% of Mexico’s salt exports and 17% of the total global salt output. Id. And as to the third factor, “it is undisputed that the government of Mexico continues to exist.” Id.

No Determination About Existence of Commercial Exception to the Act of State Doctrine

Finally, the Ninth Circuit addressed the plaintiffs’ argument that the court should apply a commercial exception to the act of state doctrine. Id. at *7. A plurality of the Supreme Court discussed a commercial exception to the act of state doctrine in Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682 (1976), which would “distinguish between the public and governmental acts of sovereign states on the one hand and their private and commercial acts on the other.” Id. at *7 (quotation marks omitted).

The Ninth Circuit surveyed decisions concerning the existence of the commercial exception, observing that previous Ninth Circuit decisions have alternatively “appeared to reject a commercial exception” on the one hand, and “stressed that the existence of a commercial exception is an undecided question,” on the other. Id at *7. The court further observed that the Fifth and Eleventh Circuits have held that the exception does not exist, while the D.C. Circuit has adopted it. Id. at *8.

Ultimately, the court determined that it “need not decide whether the act of state doctrine includes a commercial exception, because any such exception would be inapplicable here,” because “the acts alleged here—decisions about the exploitation and distribution en masse of Mexico’s sovereign natural resources—are exactly the kinds of powers that are ‘peculiar to sovereigns.’” Id.at *8.

Conclusion

The Ninth Circuit concluded that the district court properly applied the act of state doctrine, but it also emphasized “the narrow nature” of the holding, explaining that “on the facts of this case—which amount to a challenge to the Mexican government’s policy decision about how to dispose of essentially its entire salt output—application of the act of state doctrine is appropriate to preclude out courts’ consideration of the action.” Id. at *9 (emphasis added). Although the court took the opportunity in this case to expressly state that the actions of corporations 51% owned by a foreign government can claim the benefits of the act of state doctrine—and that their alleged co-conspirators can invoke the doctrine in their own defense—it is uncertain whether the act of state doctrine could apply to foreign government-owned corporations that are less-than majority controlled by that government.