Applebaum, Harvey M.

Fox, Eleanor M.

Gallardo, Gabriel Castaneda

English

University of New Mexico

United States - Mexico Law Journal
Volume 4 United States and Mexican Competition and
Trade Law Article 12
3-1-1996
Panel Discussion Part 3: Horizontal Restraints of
Trade between Competitors in Mexico and the
United States
Eleanor M. Fox
Gabriel Castaneda Gallardo
Harvey M. Applebaum
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Recommended Citation
Eleanor M. Fox, Gabriel C. Gallardo & Harvey M. Applebaum, Panel Discussion Part 3: Horizontal Restraints of Trade between
Competitors in Mexico and the United States, 4 U.S.-Mex. L.J. 99 (1996).
Available at: https://digitalrepository.unm.edu/usmexlj/vol4/iss1/12
PART THREE: HORIZONTAL RESTRAINTS OF TRADE
BETWEEN COMPETITORS IN MEXICO AND THE
UNITED STATES
MODERATOR: MICHAEL W. GORDON*
PANEL MEMBERS:
ELEANOR M. FOX,**
GABRIEL CASTANEDA***
HARVEY APPLEBAUM****
THE PROBLEM
The initial marketing of Sollate TM in Mexico by AGRICOLAS was in
the area of Mexico City. It concentrated its efforts on building a strong
base in the Mexico City area. Meanwhile, GROWFAST, Inc., began to
market SollateTM and-other fungicide and pesticide products in northern
Mexico, including the Monterrey area. AGRICOLAS has begun to sell
a product which competes with SollateTM and is also marketing some
newly developed fungicides and pesticides. GROWFAST is concerned with
the rapid growth of AGRICOLAS and especially with its marketing a
product similar to SollateTM. It believes the most appropriate solution
would be to modify its agreement with AGRICOLAS. AGRICOLAS
agrees that some settlement of these concerns is necessary. They mutually
agree to the following:
1. AGRICOLAS will discontinue its modest sales of SollateT in
northern Mexico and Veracruz;
2. Both companies will compete in Guadalajara and the strip along
the western coast of Mexico;
3. GROWFAST will not attempt to sell Sollate TM in Mexico City
or any of the remainder of Mexico;
4. AGRICOLAS will discontinue selling a new fungicide produced
by Insecticides de Jalisco, S.A. de C.V., and all other competing
products except for competing products developed by and owned by
AGRICOLAS;
5. AGRICOLAS will grant GROWFAST the exclusive right to U.S.
sales of any new pesticide or fungicide products devel oped by AGRI-
COLAS;
6. AGRICOLAS will adhere to prices recommended by GROWFAST
for the sale of any GROWFAST products in Mexico; and,
7. GROWFAST will adhere to prices recommended by AGRICOLAS
for the sale of any AGRICOLAS products in the United States.
* Chesterfield Smith Professor of Law, University of Florida College of Law.
** Walter Derenberg Professor of Trade Regulation, New York University School of Law.
Partner, Castafteda y Asociados, Mdxico, D.F.
Partner, Covington & Burling, Washington, D.C.
U.S.-MEXICO LAW JOURNAL
THE DISCUSSION
Michael W. Gordon: Now the parties have been functioning for a
while, they have been encroaching on each other's turf to certain degrees
and they have decided to sit down and carve up the territory. How do
we look at the horizontal restraints in contrast to the vertical restraints,
from the perspective of Mexico and the U.S. competition laws?
Gabriel Castafieda: On the merits of the case as it is here, it looks
like these are not violations of Article 9 of the Mexican competition law.'
This case, at first, seems to involve a horizontal practice among com-
petitors doing several things: market allocation, price fixing, and several
others that might come into the same category. But on a second, more
profound look, there are some facts we have to take into consideration.
The first question to be asked in regard to Mexican jurisdiction is are
these two really competitors or not? Article 9 of the Mexican law is not
specific about it, so we have to try to prove whether they are not
competitors. This is very important. Has AGRICOLAS the possibility
of competing with the U.S. company or not? On first review the answer
will be no. This is just a distribution arrangement and the U.S. company
is not interested in doing business directly with a special corporation in
Mexico. The U.S. company simply enters into a contract with AGRI-
COLAS to sell the product exclusively. There would be a problem proving
those two companies are competitors. However, there may be a potential
competitor issue.
Eleanor M. Fox: From the United States point of view we have exactly
the same questions. We want to know if and when AGRICOLAS becomes
a competitor. As long as AGRICOLAS is simply a distributor for GROW-
FAST, this presents only a vertical problem. GROWFAST may have set
up AGRICOLAS as its prime or exclusive distributor in Mexico; it may
have decided that it wants to also offer the same product in the same
territories as its distributor in Mexico; or it may decide that it wants to
reserve some Mexican territories for itself and give AGRICOLAS other
territories. That is not considered a horizontal restraint; it is considered
a vertical restraint. It reflects the producer's decision of how it wants
to distribute its product. At first, AGRICOLAS, which distributes Sollate T',
is only handling the distribution of another firm's product. Later, AGRI-
COLAS develops its own product. So let us take the first stage. AGRI-
COLAS is distributing the product of two producers. Is the second product
really competitive with SollateTM, so that there is a new competitor on
the market competing with GROWFAST's SollateTM? AGRICOLAS is
distributing the product of a competitor to SollateM and GROWFAST
says, "Oh, I don't want you to do that, get rid of my competitor's
product." Under U.S. law, this is not a problem as long as the competitor
of GROWFAST, which has a product competitive with SollateTM, has
1. Ley Federal de Competencia Econdmica [Federal Economic Competition Law-hereinafter
Mexican Competition Law], ch. II, art. 9, DrALRo ORcIIA. DE LA FEDERAC16N [Daily Gazette of the
Federation-hereinafter D.O.] (Dec. 24, 1992).
[Vol. 4
PANEL DISCUSSION: PART THREE
other ways of distributing its product. Since the competitor seems to be
a Mexican producer, it could probably get its own Mexican distribution.
As long as the exclusivity imposed by GROWFAST isn't depriving the
competitor of an outlet in the market, there is no problem under U.S
competition law.
The only way I see a problem arising in this situation is if AGRICOLAS
develops its product competitive with SollateTM so that GROWFAST and
AGRICOLAS are real competitors. GROWFAST says, "OK, you dis-
tribute these two products in Mexico, do not come into the United States.
I will distribute the two products in the United States and I will not go
into Mexico." There you have a cartel. That is a real market division,
it eliminates the only competition on the market.
If both the United States and Mexico considered the provision to be
unlawful, which in my example it is, is there any method for deciding
which nation ought to pursue the matter? In this hypothetical, the con-
sumers in both countries are equally hurt and it is perfectly OK for them
both to pursue the suit. Ordinarily we might expect collaboration between
the law enforcement authorities, subject to confidentiality requirements.
This is a division of markets and is no different from saying I will take
east of the Mississippi and you take west of the Mississippi. It would
be efficient to have a common agency handling this one case. The counter
argument is that there are difficulties of getting a new supra-national
enforcement system into place.
Are there any problems with extraterritorial application? In this case,
no, because it is one ball of wax that has significant effects in both
territories. What if the United States brought an action against both
companies for dividing territories in both the United States and Mexico,
and Mexico brought the same action? The answer is it would be fine.
Harvey Applebaum: The first issue is whether the companies are com-
petitors. Until AGRICOLAS developed its own competing product they
were not competitors. Once they became competitors, with one of them
being a U.S. company, and they agreed not to compete in the United
States, there is a criminal offense subject to imprisonment and fines as
well as a civil violation.2 It is clearly a horizontal agreement to divide
territories, and therefore it is horizontal restraint which has been per se
illegal and criminal in the United States for a very long time. 3
Under these facts no one, even in Mexico, can realistically claim that
the United States has exercised undue jurisdiction. The agreement by
AGRICOLAS not to sell to the United States is clearly an agreement
not to do business in the United States. One of the clearest areas of
U.S. jurisdiction is imports to the United States.4 If AGRICOLAS and
another Mexican company were to fix their prices on their sales into the
2. Sherman Anti-Trust Act, ch. 647, sec. 1, 26 Stat. 209 (1890) (current version at 15 U.S.C.
§§ 1-7) (1994).
3. id; See also U.S. Dep't of Justice, Antitrust Enforcement Guidelines for International
Operations (April 1995), reprinted in, 4 Trade Reg. Rep. (CCH) 13,107.
4. Id.
19961
U.S.-MEXICO LAW JOURNAL
United States, that would clearly be illegal under U.S. law.5 Assuming
the companies are actual competitors or clearly potential competitors, an
agreement to allocate markets would violate both the U.S.6 and Mexican
antitrust laws. 7 If that is so should there not be some kind of NAFTA8
application?
The long-term issue of whether there ought to be a common NAFTA
antitrust law and therefore a common enforcement agency are dealt with
in the American Bar Association Antitrust Section Task Force report on
the competition dimension of NAFTA.9
Gordon: Assuming these two companies have become competitors why
not simply restructure, form a 50-50 joint venture in Mexico, and let
that company handle all the problems?
Fox: If the facts are; there was a market in this one orchid- enhancing
fertilizer; there were only two competitors in the market; and the two
competitors merged. This is clearly illegal. Therefore a joint venture
would also be illegal.
Gordon: The formation of a joint venture in Mexico would be illegal
under U.S. law. What about under Mexican law?
Castafieda: Assuming both corporations are now competitors in Mexico,
I think it would be illegal. If the transaction exceeds the threshold
established by the Mexican Competition law' 0, they would have to go to
the Federal Competition Commission for clearance." If not, I think this
would be clearly just a vehicle to cover some sort of illegal intent to
monopolize or exclude other competitors from the market.
Gordon: If they did get clearance from the Commission in Mexico to
do this, would the United States then possibly pursue it as an illegal
activity?
Fox: First of all, to make it interesting, you might say there is a really
serious market definition problem. Mexicans might say that SollateTM and
its competitor are wonderful orchid- enhancing fungicide, but there are
a lot of other fungicides that do basically the same thing, even orchid
enhancement. And the United States might look at it and say, "No, we
think nothing else will do for orchids, there is no close substitute that
is going to put a good price constraint on GROWFAST and AGRI-
COLAS." That is where you are going to have your interesting questions.
You do have questions like that all the time. We had one in the
Consolidated Gold Fields case 2 where there was a question whether the
5. Id.
6. Id.
7. Mexican Competition Law, supra note 1.
8. North American Free Trade Agreement, Dec. 17, 1992, U.S.- Can.-Mex. effective Jan. 1,
1994), 32 I.L.M. 605 (1993) [hereinafter NAFTA].
9. Report of the Task Force of the ABA Section of Antitrust Law on the Competition Dimension
of NAFTA (July 20, 1994) [hereinafter ABA NAFTA Report).
10. Mexican Competition Law, art. 12-13.
11. Article 23 of the Mexican Competition Law creates the Comisi6n Federal de Competencia
(Federal Competition Commission) [hereinafter Commission] as an independent agency of the Se-
cretaria de Comericio y Fomento Industrial (Mexican Department of Commerce) [hereinafter SECOFI].
12. Consolidated Gold Fields, PLC v. Anglo American Corp. of South Africa, Ltd., 698 F.Supp
[Vol. 4
PANEL DISCUSSION: PART THREE
Oppenheim interests in South Africa were monopolizing world gold pro-
duction. On the other side of the ocean, the European Community thought
the market was really broad and included gold futures. A U.S. Federal
District Court in New York City said that mined gold was the market,
making the merger illegal. 3 The federal court actually stopped the whole
merger, though it had been approved by the European Community and
the United Kingdom. So it is possible that Mexico could say the market
is much broader and, in fact, the joint venture is productive and going
to do good things for orchids. On the other hand, the United States
could say, "That is not the way we look at it, there is monopolization
here and it's illegal and we want to stop it." Suppose the United States
sues and it orders its own company not to join this joint venture. A
U.S. court could actually restrain AGRICOLAS if it has personal ju-
risdiction over AGRICOLAS. Then there would be a direct conflict. How
is that possibly to be resolved? In the ABA NAFTA Report we suggested
there ought to be dispute resolution for such problems. There ought to
be recourse to a higher level disinterested panel that will look at the
problem with a view from the top, the business efficiency and consumer
interests of North America, and make a decision one way or the other.
Applebaum: If the joint venture is simply a disguise for an allocation
and division of the market by competitors, then there is no need to do
a relevant market review under U.S. law. For example, if there is an
agreement not to compete between the two competitors, that is illegal
under the U.S. law regardless of whether there are others in the market
and regardless of whether there are other pesticides that would do a
good job with orchids. So the relevant market issue is considered in joint
venture and merger analysis but it is irrelevant in a straight price fixing
arrangement between competitors.
If we forget the joint venture for a moment and return to where we
started: there are two competitors and they are clearly allocating and
dividing markets and/or fixing prices within Mexico. Is there any need
to look at the relevant market under Mexican Competition Law?
Castafieda: It would not be a defense in Mexico either. However, I
want to make two comments. First, I think the probability of the United
States being interested in the case because of the fact that there are no
U.S. consumers affected by this is very slim because of the fact that
there is no U.S. consumers affected by this. Why would the United States
be interested in this unless someone in the United States trying to export
the product and is being excluded from the Mexican market?
Second, I would be worried about the per se classification of these
practices. There are many U.S. companies that are in fact looking for
more efficient ways to market their products in Mexico. Government
regulators should offer a practical solution.
487 (S.D.N.Y., Oct. 24, 1988); cert. dismissed by, Minorco v. Consolidated Gold Fields, PLC, 492
U.S. 939, 110 S.Ct. 29 (1989).
13. Id.
1996] 103
U.S. -MEXICO LAW JOURNAL
At what point does the U.S. company become a competitor of AGRI-
COLAS? What is a per se price fixing or market allocation violation?
The regulators should look at the facts and perhaps into the actual
relevant market and the efficiencies of it. I think this is going to be a
problem when the case comes to Mexico, not because the Mexican law
allows for some sort of defense in horizontal price fixing case, but rather
because of the competitive issue.
Applebaum: I agree with you that none of these facts are likely to
raise U.S. antitrust issues, until you reach a point where AGRICOLAS
is truly able to compete with SollateM and is negotiating with a U.S.
company to export its product into the United States and GROWFAST
seeks to block the exports pursuant to its agreement with AGRICOLAS.
I think, practically, that would be the first time that the U.S. government
enforcement agencies would be interested, when the prospect of com-
petition in the United States with SollateTM has been foreclosed by a
market allocation agreement.
Fox: I want to be clear that I was talking about the hypothetical in
which the two companies were actual competitors, made their own prod-
ucts that were actually competitive and they were potentially each selling
both in the United States and Mexico but they had agreed to stay out
of the territory of one another. There was a real competitor market
division.
QUESTIONS AND ANSWERS
Allan Van Fleet: I would like the panel to address the vertical situation.
Assume AGRICOLAS has distributorships all over the place, Reynosa,
Ciudad Juarez, Nuevo Laredo, and so on. We are strictly in the vertical
phase here. What about the agreement of AGRICOLAS that it will not
resell SollateTM into Laredo or McAllen or El Paso. AGRICOLAS agrees
to stick to distribution in Mexico. How is that analyzed under U.S. law?
What if the United States orchid growers complain to the Antitrust
Division?
Fox: I think that is a better case for no violation than there is for
violation. The reason is this. It is a vertical restraint by a monopolist
under a U.S. patent. It is not possible to use this vertical restraint to
cartelize because there are no competitors of GROWFAST. In the United
States when you start analyzing whether a non-price vertical restraint is
illegal, the main thing you look at is whether that non-price vertical
restraint can be used to cartelize with competitors at the producer level
by shutting out competition and preserving the oligopoly in the territory.
Here there is not a potential for facilitating a cartel. It is a monopolist,
single firm restriction. The monopolist will be selling to its distributor
at a price that is satisfactory to it, meaning that it is going to get that
monopoly profit up front, and now the distributor is going to sell at a
price satisfactory to it. The high price has already been charged up front
and there is probably no harm to consumers.
Van Fleet: Suppose AGRICOLAS is a tough bargainer and GROW-
FAST agrees to permit sales by AGRICOLAS in Texas and California
[Vol. 4
PANEL DISCUSSION: PART THREE
but AGRICOLAS must sell at the same $20 per pound that U.S. dis-
tributors generally charge.
Applebaum: After the Sylvania case 4 , non-price vertical restraints are
decided under the rule of reason and are quite defensible. But my view
would be that if GROWFAST says you can resell in California and
Texas, only at a fixed price, that is illegal vertical price fixing. U.S. law
clearly applies because it is an importation. Vertical price fixing remains,
per se, unlawful. It is a good demonstration of how you can move
quickly from a very defensible rule of reason situation and distribution
arrangement into a very vulnerable per se arrangement.
14. Continental T.V., Inc., v. GTE Sylvania Inc., 433 U.S. 893, 97 S.Ct. 252 (1977).
19961 105



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