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TUESDAY, JULY 29, 1975



Washington, D.C.

The subcommittee met at 3:05 p.m. in room H-236, the Capitol, Hon. Robert N. C. Nix (chairman of the subcommittee) presiding. Mr. Nix. The subcommittee will come to order.

Today we will take up an issue within the direct legislative jurisdiction of this committee, that is the Military Sales Act. Military sales legislation will be considered in September. The specific issue we are considering today is the part played in military sales contracts by foreign sales agents and the fees paid to them which discussion could easily serve as the basis for an amendment when the military sales hearings begin in full committee.

In military sales, the role played by the foreign agent is a political as well as a business role, At a time when European and American arms makers are in a race to move their products in the Middle East in order to obtain a share of the $50 billion a year oil profits resulting from the 400-percent increase in the price of oil, foreign sales agents are employed to use any and all devices to insure sales.

Northrop Aviation has admitted paying two Saudi generals $450,000 through a foreign sales agent. The agent, a Saudi Arabian businessman with holdings of over $400 million and $100 million of that invested in the United States, was recently in the news after he failed to take over a San Jose, Calif., bank by investing $14 million. He failed when shareholders in the bank refused to sell after learning his identity. Obviously, he is a major political as well as business power in the Middle East.

Our previous 3 days of hearings have demonstrated that many Federal agencies, especially the Securities and Exchange Commission, are facing up to a serious situation. The Internal Revenue Service has begun an investigation which will mean auditing the returns of all 111 major companies.

The Civil Aeronautics Board has followed the lead of the SEC in demanding disclosure in the airlines industry while the Overseas Private Investment Corporation and the Antitrust Division of the Department of Justice are prepared to act under their statutes.

The information which has served as a basis of action so far in these Agencies is derived from the efforts of the Watergate Prosecutors Office. That information is almost exhausted now. Those Federal

regarded as involving a conspiracy between the firm giving the bribe and the recipient government official.

If a Sherman Act section 2 monopolization charge is to be employed, then it would be necessary to delineate a relevant product and geographic market in which the alleged monopolist is dominant. The larger market for all U.S. exports to all U.S. imports of a product would probably be easier to defend than a market tied to a particular local country.

At this point let me turn then to five different hypothetical situations involving payments to foreign officials which might raise problems.


Perhaps the most common form of bribery is one which "greases the wheel," payments for "future considerations" without immediate prospect of advantage, offered in the hope that it will smooth future access to or cooperation from government officials. This kind of bribe, about which we have been reading a good deal recently, would most certainly not be, in itself, an antitrust violation. The reason is that such bribes are unlikely to have any direct and identifiable effect on U.S. foreign commerce. The bribe is not intended to harm a U.S. competitor's export opportunities. In sum, neither payment nor the withholding of payment can be directly related to the flow of imports into or exports from U.S. markets.




A second situation is one in which a U.S. firm, say, sells its product directly to a foreign government for its own use, bribing the responsible foreign procurement official to choose its product over that of a particular competitor. If the bribe is paid for the purpose of excluding the product of a non-U.S. competitor, there is no likely violation of U.S. law since there is no anticompetitive effect on U.S. foreign commerce. Of course, this may well be a violation under foreign antitrust law, most likely, if at all, that of the country whose government is making the purchase.

If, however, to change the facts, a Delaware corporation is paying a bribe specifically to insure that a foreign procurement officer buys its product to the exclusion of its principal competitor, a New Jersey corporation, there would then be an impact on U.S. foreign commerce. It is not necessarily, however, a violation of U.S. antitrust law. Whether or not there is such a violation of the Sherman Act might well depend, for example, on whether the procurement officer was acting in his official capacity on behalf of his government in accepting the payment or whether he was acting outside the scope of his authority. If the former, actual execution of the purchase might well be an act of state. The act of state doctrine thus might insulate the Delaware corporation from antitrust liability since holding it liable would imply a judgment about the conduct of the foreign government officer, within his or her own territory, and this is just what the act of state doctrine seeks to avoid.1

1 See, for example, Occidental Petroleum Corporation v. Buttes Gas & Oil Co., 331 F. Supp. 92 (C.D. Cal. 1971), aff'd per curiam, 461 F. 2d 1261 (9th Cir.), cert. denied. 409 U.S. 950 (1972).

If however, the procurement officer pickets the bribe, without official sanction, the act of state doctrine would probably not apply. This may be inferred from the interesting case of Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 707 (1962). In that case the Canadian Government appointed a Canadian corporation to act as that nation's exclusive agent to purchase for and allocate to Canadian industry the rare metal vanadium during World War II. When it was short. Without being authorized or required to do so, the Canadian agent made purchases which discriminated against the plaintiff and aided the Canadian agent's U.S. parent in restraining and monopolizing the vanadium industry.

Bribery as it happens, does not appear to have been involved, since the agent's heart already belonged to the company seeking preferential treatment. The Supreme Court held the defendants liable for violating the Sherman Act, declining to find that the agent's conduct had been directed or ratified by the Canadian Government.

Continental Ore has rather special facts which are not likely to be present in most situations involving bribery of government procurement officers. First, Continental Ore involved a conspiracy not only between one private firm and a government officer but a conspiracy among other private firms as well.

It is not clear that the requirement of section 1 of the Sherman Act that the restraint of trade be the result of a conspiracy will be met by a simple relationship between a single private firm and a single bribed government official, even one acting outside the scope of his or her authority. There is a domestic antitrust inducement case, Harman v. Valley National Bank of Arizona, in which the Ninth Circuit Court of Appeals reversed the district court's dismissal of a Sherman Act complaint. The complaint alleged that the then Attorney General of Arizona-who was the State's banking supervisor-was a coconspirator in an extensive scheme by several leading Arizona banks to restrain and monopolize commercial banking in that State and that he had pursuant to that conspiracy closed down the plaintiff's bank. But the court made clear that more than one private firm was involved in the alleged bribe.

A second, related factor is that in both the Continental Ore and in Harman the alleged antitrust violation was a much more extensive scheme of conduct than merely inducing specific discriminatory behavior by a specific government official. There would likely be judicial reluctance to use the antitrust laws to deal with a simple bribery situation where the commercial impact of that bribe was relatively limited. These two factors would weigh against successful prosecution of a section 1 action on the given facts.

Third, the defendants in Continental Ore had virtually total control over the U.S. production of vandium and over the vanadium sold in the United States. This degree of market power amply justified a finding that the defendants had monopolized the relevant vanadium market, North America, in violation of section 2 of the Sherman Act. It would be most improbable that even an extended sequence of bribes and sales to a foreign government would involve sufficient domination of any product market relevant to U.S. commerce in a normal kind of


1339 F. 2d 564 (9th Cir. 1964).

2 See, for example, Parmelee Transportation Company v. Keeshin, 292 F. 2a 734 (7th Cir. 1961).


A third type of payment, depending upon how you look at it, is probably not a "bribe." Rather, it is a "contribution," "g "assessment,' ?? "license fee" or whatever which private firms or private nonnational firms are required to make to a foreign government as a condition of doing or continuing to do business in a foreign country. The test of whether it is a "bribe" to the foreign official or a "payment" to the foreign government can probably best be developed under section 162 (c) of the Internal Revenue Code. Where the payment is to the government, the principle of sovereign immunity would, in most situations preclude U.S. antitrust enforcement against the foreign government. In any event, it is difficult to make any very direct connection between any such general levy-whether "bribes" paid to foreign officials or "fees" paid to a foreign government-and U.S. export to import commerce. No other U.S. firm is being foreclosed by the payments. Thus, the "bribes" or "fees" are simply a cost which the U.S. firms or the U.S. consumer may have to absorb in the long run.

One example of such payments on a significant scale might be the recent tax imposed on the export of bananas by certain Central American governments. Another might be the imposition by member states of the Organization of Petroleum Exporting Countries (OPEC) of uniform tax and royalty rates on crude oil exports. Even if these fees were to have the requisite direct effect upon U.S. commerce, foreign governments would most likely be free from prosecution due to the consideration of sovereign immunity.


Perhaps the most interesting and currently relevant situation in which bribery of foreign officers may arise antitrust violations is one in which two or more private firms, one or more of them American, conspire to restrain trade in and monopolize a raw material which is an important U.S. import, using bribes to further their purpose. Two important foreign commerce antitrust cases to a degree illustrate this example, although in neither case do the reported facts recite that bribery in fact occurred.

The first case involved bananas imported from Panama. In the early part of the century it seems that the United Fruit Co. induced Costa Rica to send troops into territory now part of Panama. This military action added land to Costa Rica and drove out United Fruit's only significant competitor in the production for and distribution of bananas to the United States. United Fruit acquired the valuable property seized from its competitor for a bargain price from its appropriator after the conquest. This military action was the last and most dramatic act of a banana cartel which had, by actions within and without the United States, come to monopolize the Central American banana industry.

The second case involves sisal, a fiber then indispensible for making twine. About a decade later, three U.S. banks acquired a supply of sisal as security for defaulting loans. They formed a conspiracy in the United States with other American firms to get virtually total control over the production and distribution of sisal. Sisal was then grown primarily in the Mexican State of Yucatan. The conspirators orga

nized a Mexican corporation to act as the sole purchaser of sisal from Yucatan producers and a U.S. corporation to act as the sole importer into the United States. To assure their domination of the product, the conspirators solicited and secured passage of laws favorable to them and detrimental to their competitors by the governments of the Republic of Mexico and the State of Yucatan. As exclusive agents for the sale of Yucatan sisal, the conspirators were able to manipulate the U.S. sisal market so as to destroy all U.S. competition.

The facts of these two cases seem about as close as real world cases ever get. When the injured competitor sued United Fruit, the Supreme Court upheld the dismissal of its action, involving the act of state doctrine.1

However, when the Government brought suit against the sisal combine, the Supreme Court reversed the lower court's dismissal and distinguished away the Banana case.2

The Sisal facts, said the Supreme Court, were "radically different from those presented" in the Banana case. The basis for the distinction was, purportedly, that the sisal monopoly had engaged in significant ongoing activity within the United States, not just in a foreign country.

Furthermore, these activities had a substantial effect on U.S. internal markets. Conceding that the Sisal conspirators were aided by the discriminatory Mexican legislation, the Supreme Court nonetheless suggested that the foreign governmental action was merely one relatively minor element in a total scheme of conduct primarily constituted by the actions of the private defendants themselves within U.S. jurisdiction.

The language in Sisal that the facts "radically differ" reminds me of a comment made by a law professor who suggested that whenever a judge uses strong adjectives to assert a proposition, the proposition is probably a weak one. Although it is still cited as good law, I think the Banana case is most sensibly read as being overruled by Sisal for most purposes. I think the Sisal case remains good law today. Therefore, what I conclude is that the attempt by a group of American firms or a domestic monopolist to use bribes of foreign officials to tie up the main foreign source of an essential raw material used in the United States would, in fact, state a cause of action under our antitrust laws. It may be, however, that where the bribery is designed to get a foreign sovereign to exercise a territorial claim or to take other political action against some other foreign power, that the essential act-the assertion of the claim-is so much an "act of state" that the whole transaction may be exempt from antitrust law.

This is one reading of the Banana case and of the recent Occidental Petroleum Case --both of which involved an American firm inducing a foreign state to exercise a territorial claim highly favorable to it and highly unfavorable to another U.S. firm.


A harder case, my final example, is suggested by a tailoring of the Sisal facts and illustrates the point. Assume that prior to the filing of the Government's suit, the Sisal defendants ceased to control U.S. domestic sisal consumption markets and concentrated their price-fixing activities at the production level abroad.

1 American Banana Company v. United Fruit Company, 213 U.S. 347 (1909). United States v. Sisal Sales Corporation, 274 U.S. 268 (1926).

See footnote 1, p. 90.


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