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SCOTUS ruling chips away at sovereignty defense

One hundred fifteen years ago, during America’s first great age of monopoly (we’re living through the second), United Fruit Co. controlled 80 to 90 percent of the nation’s banana market and didn’t tolerate rivals. Sometimes its persuasion was purely economic. According to Oliver Wendell Holmes, United Fruit, acting “with intent to prevent competition and to control and monopolize the banana trade, bought the property and business of several of its previous competitors, with provision against their resuming the trade.”

In One Hundred Years of Solitude, Gabriel García Márquez, rather more vividly, described a lightly disguised United Fruit relying on “hired assassins with machetes.” United Fruit also systematically corrupted the Costa Rican government. Our term “banana republic” harks back to the days of United Fruit’s dominance.

When a competitor, American Banana Co., developed a plantation in Panama and refused to sell out, “Costa Rican soldiers and officials, instigated by” United Fruit, crossed the border and seized the plantation. Costa Rican courts corruptly transferred title to a third party, who promptly passed it along to United Fruit.

Because both United Fruit and American Banana were U.S. companies and were fighting for shares of the American home market, American Banana sued in federal court, alleging a violation of the antitrust laws. Antitrust laws (so-named because many of the early conglomerates were structured as trusts rather than corporations) are intended to promote competition and prevent monopoly. Arch-monopolist United Fruit’s defense was that it was not responsible for the actions of the Costa Rican government. The U.S. Supreme Court agreed.

Justice Holmes ruled that American courts are not in a position to decide that a foreign government was persuaded to act by bribery, since the government in question “makes the persuasion lawful by its own act. The very meaning of sovereignty is that the decree of the sovereign makes law.” The acts of the Costa Rican state, lawful within Costa Rica, could not be declared illegal in America. United Fruit reaped the rewards of its corrupt monopoly.

That result was wildly unjust to American Banana. But it accorded with the U.S. Constitution, which grants Congress the power to regulate international trade and gives the President authority to conduct foreign relations. Nothing in the Constitution authorizes our judges to decide whether the acts of foreign governments conform to the requirements of American law.

Fast forward to the 21st century. “By 2001, Chinese suppliers had captured 60% of the worldwide vitamin C market,” according to the 2nd Circuit Court of Appeals. In 2005, American resellers brought an antitrust suit, alleging the suppliers had fixed prices by forming a cartel to limit production, creating an artificial shortage of supply.

“Rather than deny the Plaintiffs’ allegations, Defendants instead moved to dismiss on the basis that they acted pursuant to Chinese regulations regarding vitamin C export pricing and were, in essence, required by the Chinese Government … to coordinate prices and create a supply shortage.” The Chinese suppliers relied on the United Fruit “act of state” defense. The formation of the price-fixing cartel was, they claimed, commanded by the Chinese government, and it was not for the American courts to judge the acts of a foreign state.

The Chinese Ministry of Commerce filed documents supporting the defendants’ contention that they were at all times acting under the compulsion of Chinese law. But the Chinese government had said exactly the opposite to the World Trade Organization, when it solemnly declared that it abandoned “export administration” of vitamin C back in 2002.

Presented with evidence of this contradiction, a district court jury rejected the act of state defense and awarded the plaintiffs $147 million. The appeals court reversed, holding that American courts are required to accept a foreign government’s interpretation of its own laws. But the Supreme Court recently disagreed, ruling unanimously that American courts have the authority to determine whether foreign officials are lying about their nations’ legal systems. Unfortunately, the justices gave only vague guidelines for evaluating official statements about distant legal systems, and didn’t explain how American judges should go about acquiring the technical skills necessary to conduct meaningful legal research across six continents.

Nor did the justices give any consideration to the original basis for the act of state defense, that it’s improper for courts to intervene in America’s foreign relations. At a time when our political leaders are threatening a trade war, one might question how helpful it is to make the payment of $147 million depend on a randomly selected judge’s opinion about the respect due the Chinese Ministry of Commerce. As often before, the court has left it to others to deal with the practicalities of its decision – and the fallout.

Joel Jacobsen is an author and has recently retired from a 29-year legal career. If there are topics you would like to see covered in future columns, please write him at