By Alexandra B. Hess*
Introduction
Unquestionably our legal system encourages and touts the benefits of settlements. There are a variety of reasons why settlements might make economic sense for both plaintiffs and defendants alike. If both parties assess their individual situation and can agree on a settlement figure, then both have weighed the merits of the claim and the risk of litigation and determined that there is a benefit to settlement. This cost/benefit analysis is no different in the trade arena. Why then do some call trade settlements a "legalized shakedown racket" or worse, "extortion"? Although many argue that there is something inherently different about the trade context that renders settlements illegitimate and objectionable (even illegal), the real issue is quite different. Those who seek to illegalize trade settlement generally cite three areas of contention regarding settlements that are specific to trade: first, trade policy in the context of the General Agreement on Tariffs and Trade ("GATT"); second, the distribution of the settlement payments to the U.S. domestic industry; and third, the fact that trade settlements are paramount to extortion of foreign producers. Upon closer examination, however, none of these issues are with trade settlements per se, but rather with the U.S. trade remedy system itself. Accordingly, the solution is not to illegalize settlements in the trade context, but rather to work toward refining the U.S. trade system that can, at times, permit perverse settlement incentives.
I. Trade Background and Settlements in the Trade Context
To understand this debate requires a minimum knowledge of the U.S. antidumping trade remedies system. The following is a very simplified explanation of an extremely complex and multifaceted system. Under the GATT, country-members agreed to continually work to lower barriers to trade, which has predominantly manifested itself by way of lowering tariffs on goods. To prevent "unfair" trade within this "open-border" policy, member-countries also agreed to measures to counteract "dumping" (i.e., price discrimination between markets). For purposes of illustration, motorcycles will be the example. If a U.S. manufacturing industry of motorcycles believes that foreign producers are causing them injury by selling their motorcycles in the United States for less than fair value (e.g., less than the price in the home market or that it cost to make the motorcycle plus profit), then the U.S. manufacturers can bring a petition to the U.S. government seeking relief. Upon submission of a petition, the U.S. government conducts a bifurcated investigation to determine whether the motorcycles were actually sold for less than fair value (U.S. Department of Commerce) and whether the U.S. industry has been injured by reason of these imports (U.S. International Trade Commission).
The investigation consists of preliminary determinations, fact verification and briefing periods, and then final determinations. If both dumping and injury are found, Commerce will determine a dumping "margin"—the amount by which the fair market value of the motorcycle exceeds the foreign producer's U.S. selling price. Each time a motorcycle comes across the border, U.S. Customs and Border Protection ("CBP") will levy that margin (antidumping duties) to raise U.S. prices in an effort to mitigate the injury to the U.S. producers. For the same-country foreign producers not named, Commerce creates an averaged "all others" rate. The dumping margins are specific to each foreign motorcycle producer named, however, and a review of that margin can be requested annually. This article focuses on settlements in the context of the request for these annual reviews because they provide the most common set of circumstances under which trade settlements occur.
The manner in which duties are levied is also important to the trade settlement debate. The essence of this duty collection system, for purposes of this discussion, is that only estimated duties are deposited upon importation based on the last antidumping margins found by Commerce. The final duties are not assessed until a subsequent annual administrative review, which does not conclude until long after the imports are made—resulting in retrospective final liability. The final assessment rate from a review can be higher or lower than the earlier estimated deposit rate. If no review is requested, the rate does not change and the deposit rate becomes the assessment rate—the status quo is maintained.
Either Commerce, the domestic industry, foreign governments, foreign producers, or importers can ask for a review of the dumping margin on an exporter-specific basis. If no other party intervenes to request a review, however, the domestic industry can dictate which producers will be or will not be subject to the risk of a review. For example, if the domestic industry names only two out of five foreign producers, the three left out will maintain their same current rates. The rates will change only for the two reviewed. Those two foreign producers then must make individual risk determinations about the likely outcome of the review, which also must take into account the considerable costs and burden of defending a review. On the other hand, if the domestic producers can be convinced to withdraw the review request, the review will be "settled" (i.e., it will not be conducted for the foreign producer for whom the request was withdrawn). This review process, and thus settlement assessment, repeats yearly.
II. Settlement Incentives in the Trade Context
The uncertainty created by this retrospective system for foreign producers provides a significant incentive to settle with the domestic industry. For example, the calculations for whether goods are sold at less than fair value and for determining dumping margins are exceptionally complex, are often made with less than perfect information, and are a function of extreme discretion by the administering agency. It is often difficult for foreign producers to provide accurate data to Commerce's standards on how much it costs to produce a motorcycle when, for example, they also produce mopeds and dirt bikes. To further complicate the issue, if the foreign producer resides in a non-market economy such as China, Commerce will use surrogate prices for constructing cost from a third country where production costs can vary widely from those actually incurred by the foreign producer subject to the review. All of these complications lead to a difficult model for creating a predictable and consistent outcome. Thus, a foreign producer may find the review process in-and-of-itself too risky and value the "known" and not wish to open itself up to review. This incentive is exacerbated by the inability to pass on any duties applied retrospectively to consumers who have long ago ridden into the mountains with the motorcycles.
The incentives to settle for the domestic industry center around the ability to receive cash payments from the settlements. Before 2000, there was actually far less incentive for the domestic industry to settle and withdraw a foreign producer from its review request. The act of the review and resulting investigation alone, with the crippling duty deposits and costs of defense, often curbed foreign imports before a final determination of dumping was ever rendered. The motivations all changed, however, with the Continued Dumping and Subsidy Offset Act (also known as the Byrd Amendment). The Byrd Amendment provided that assessed duties must be distributed to the affected domestic producers that supported the petition, and not to the U.S. government coffers. For the first time, U.S. producers received cash as a result of these antidumping orders instead of merely the price neutralizing effect of the duties levied on foreign producers' products at the border.
The cash did not flow under the Byrd Amendment, however, when a review was requested and the estimated duty deposits remained suspended awaiting the final outcome of the review. U.S. Congress repealed the Byrd Amendment as of October 2007, but the effects are still being felt. For example, in May 2011, CBP announced that it would distribute tariffs collected on shrimp imports that had been withheld (due to litigation) since 2006. Once the Byrd Amendment money clears on entries made before October 2007, however, the domestic industries will have even more incentive to continue settlements with foreign producers, as it will be the only way to directly receive cash payments.
Given that settlements are accepted in the general litigation context as a positive avenue for disputing parties, the question arises as to whether the trade context renders settlements objectionable. As mentioned above, there are three common objections to trade settlements. First, that the essence of trade policy makes trade settlements illegitimate. Second, that the manner in which settlements are negotiated and the payments are distributed to the domestic industry makes settlements spurious. Lastly, that trade settlements by their very nature are extortionist of foreign producers. Deconstructing these arguments against trade settlements, however, leads to the same conclusion: There are inherent elements of the U.S. trade remedy system that create less-than-ideal incentives for parties to settle. If the trade community wants to do away with trade settlements, however, the remedy is not to ban settlements themselves, but to remedy the system.
a. Trade Policy
There is an undeniable head-cocking response from those who first contemplate the idea that foreign producers can pay the U.S. industry not to bring an antidumping review against it. This gut-level reaction seems to stem from the general nature of trade policy. World leaders founded the GATT (and our conforming domestic trade legislation) to promote free trade between nations because trade barriers exacerbated world economic crises. The ability for a country to implement antidumping duties is meant only to counteract an abuse of the underlying open trade policy. For example, if a foreign producer is dumping, one concern is that they may be pushing U.S. producers out of the market and thereby creating a monopolistic environment to the eventual detriment of both U.S. producers and consumers alike. Antidumping duties are presumed to avoid this result. Thus, there is uneasy feeling produced when macroeconomic policy concerns are being "settled" through undisclosed private cash payment agreements between foreign producers and the domestic industry. It seems dubious that such settlements take into account or balance all of the policy concerns at issue. To be clear, as mentioned above the U.S. Government or a foreign government could block such settlements by merely requesting review of the foreign producer at issue, but this action is rarely taken, if ever.
This policy quagmire is not unique to the trade context, however. The same issues arise with respect to settlements within the patent infringement context. The overarching policy is that competition benefits the market as a whole. Patents, however, permit a monopoly on a product when it is first introduced to the market in order to promote innovation. Patent owners will often settle with a generic entrant that might seek to challenge the validity of the patent in order to not only avoid litigation, but also to avoid loss of market share that typically occurs when a generic product enters the market. Although these settlements corrupt the underlying "competition is good" policy, these private settlements are accepted, if not favored.
In both the trade and patent infringement context, the merits of the dispute between the parties is the deciding factor as to whether the underlying policy is harmed by settlement. If the patent holder does not have a valid patent and is able to pay off a generic entrant, the two benefit to the harm of U.S. consumers and the competition policy. If a foreign producer is truly dumping and is able to pay off those of the U.S. industry that participated in the review request, the two benefit to the harm of U.S. consumers and the policy of low barriers to trade. Despite the possibility that settlement of meritless patent infringement disputes might harm the underlying policy, they are still favored. Thus, shouldn't trade settlements be similarly favored?
Not exactly. As discussed above, the complexity and difficulty of establishing consistent and predictable outcomes to dumping calculations differentiates the trade context from the patent infringement context. Settlements are generally favored because there is an expectation that the merits of the dispute will dictate a party's willingness to settle. For example, if the foreign producer knew it was not dumping, it presumably would not be willing to settle. And if the foreign producer was truly dumping and injuring the U.S. domestic industry, the settlement amount would have to make the domestic industry whole. Unfortunately, because of the inherent difficulties in the U.S. trade remedy system, the normal settlement-dictating parameters are distorted and may promote perverse settlement incentives to the detriment of both U.S. consumers, producers, and the underlying trade policy.
b. Domestic Industry Issues
Domestic industry settlement negotiations and the distribution of settlement payments is also a point of contention with regard to the validity of trade settlements. Under trade law, a review can be initiated by just about anyone. Accordingly, if one player from the domestic industry did not agree to the settlement that player could effectively destroy the domestic industry's settlement bargaining power. On the flip side, the domestic industry must speak with one voice (or at least fit around one table) during settlement negotiations, which is often carried out through a representative association. A representative association often negotiates, receives, and then distributes the settlement amount.
Concerns about the ability of these associations to properly represent the entire industry and properly disburse payments in the appropriate manner are issues that have long troubled class action litigation. For this reason class action settlements are carved out for different treatment under the Federal Rule of Civil Procedure 23(e) and require court approval—which is not the case for settlements in the general litigation context. Courts recognize the risk of perverse settlement incentives with regard to class representatives and especially class counsel. Accordingly, the court must determine in its discretion that the settlement is "fair, reasonable, and adequate." Further, class members may opt out of the settlement and presumably pursue litigation on an individual basis despite having joined the class initially.
None of these class action settlement protections are provided to the U.S. industry in the trade settlement context. Seemingly as a result, several different complaints have arisen from the domestic industry. There are complaints that the settlement money never reaches the producers themselves and thus, does not effectuate the entire purpose of permitting a review request to protect the domestic industry. There are also concerns that the requesting domestic industry can block out other competing domestics and gain settlement money to the detriment of those blocked. Further, there is criticism that the review requests, which target only a few countries, do nothing more than shift production away from those countries named to those unnamed and corrupt global trade policy. Whether these trade settlements would have stood up under judicial scrutiny for fairness, reasonableness, and adequacy, is not a part of the trade remedy system. Thus, class action-esque settlement agreements occur without procedural protections for the U.S. domestic industry.
Additionally, while the majority of settlement agreements in the general litigation context are not reviewed by a adjudicatory authority because they are considered to be purely private contracts, there are contexts in which policy concerns have led to such a requirement. For example, to protect creditors of a debtor estate, settlements in the bankruptcy context must be deemed "fair and equitable" by a court under Federal Rules of Bankruptcy Procedure 9019(a). The settlement of actions and claims arising under the Fair Labor Standard Act must also be supervised and approved for fairness by either the Secretary of Labor or a local district court pursuant to 29 U.S.C. §§ 216(b)–(c). Further, many states require the settlements of actions by or on behalf of infants or minors to be approved by the court.1 Thus, it would not be a novel idea to consider the policy concerns at issue in the trade context sufficient to warrant agency or judicial review of trade settlements.
c. Foreign Producer Issues
The term "extortion" is often bandied about when it comes to addressing a foreign producer's incentives for offering settlement in return for having its name excluded from a review request. The concern is that the foreign producer is not weighing the merits of the claim that it is dumping its product into the United States, but rather "paying to play" by avoiding burdensome legal costs and the uncertainty of a new dumping margin rate being applied to goods that have already been sold (i.e., the price cannot be passed on to the consumer).
As defined by Black's Law Dictionary, extortion is the "act or practice of obtaining something or compelling some action by illegal means, as by force or coercion." Although there is nothing illegal about settlements and foreign producers cannot effectively be forced to settle because they can always request their own review (and destroy settlement prospects), few deny repulsion if the domestic industry names foreign producers in a review request merely to exact a settlement offer. A similar loathsome response is invoked in the legal community when discussing over-reaching and aggressive plaintiff's counsel seeking settlement payments for themselves rather than justice for their clients. But the legal community also embraces the benefits plaintiff's counsel can bring to exposing bad actors and thus, attempts to thwart such "sham" litigation by enforcing minimum pleading standards and awarding attorney's fees to the defendant in certain contexts.
These balancing provisions do not exist in the trade remedy system. A request for review submitted to Commerce must "state[] why the person desires the . . . review . . . [of] particular exporters or producers." 19 C.F.R. § 351.213(b)(1). Factual submissions to Commerce must be certified that the information is "complete and accurate." 19 C.F.R. § 351.303(g). The remedy to a "knowing and willful" material false statement is a criminal sanction, pursuant to 18 U.S.C. § 1001. Yet it is hard to envision a situation under which the U.S. government would feel compelled to pursue such sanctions against a U.S. industry in this instance. And even if pursued, the ability to prove that the U.S. industry "knowingly and willfully" stated falsely that a foreign producer might be dumping (especially given the uncertainties of dumping calculations), when this was only subterfuge and the real intent only to force settlement, would be nearly impossible.
Additionally, there are anti-competition concerns that the U.S. industry could target specific foreign producers (such as foreign non-affiliates) for review requests, while not requesting reviews for their foreign affiliates or other business associates in order to push unaffiliated foreign competitors out of the market. Similarly, the U.S. industry could decide to settle with only foreign affiliated producers and block non-affiliates from settlement discussions. Thus, the non-affiliated competition would be forced to defend itself in a lengthy review process and have to make difficult decisions with regard to whether to ship goods to the United States when the final duty rate would not be determined until years down the line. In most industries, the result would be to strip the non-affiliates of any competitive advantage. Under such a scenario, the Sherman Act might provide a remedy, for example, for a U.S. downstream purchaser of goods acquired from those foreign producers that were selectively forced into reviews and excluded from settlement opportunities.
Such an antitrust suit would face significant roadblocks, however, under the Noerr-Pennington doctrine, which provides immunity from antitrust liability to those who petition the government for redress—even if the sole purpose of seeking enforcement of the law was to destroy competition.2 Although the sham exception to the Noerr-Pennington doctrine would appear to provide relief from the doctrine, judicial interpretation of the exception has so narrowed its scope as to effectively remove it from an antitrust suit arsenal in the trade context. The sham exception requires satisfaction of a two prong test. First, that the litigation be "objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits," and second, if the first prong is met, that the litigant's motivation is to "conceal an attempt to interfere directly with the business relationships of a competitor."3 For all the reasons mentioned above, the "objectively baseless" prong of the sham exception presents a seemingly prohibitive barrier to using the exception to get around the Noerr-Pennington doctrine and bring an antitrust action against a request for review submitted by domestic producers.
Conclusion
All three common objections to settlement agreements raise legitimate concerns, but not about settlements per se. Instead, the concerns reveal inherent characteristics of the U.S. trade remedy system that promote less-than-idyllic incentives to settle. While beneficial settlements should be lauded, abuse of a difficult-to-administer system should not. Many solutions could be suggested, such as requiring an easier mechanism for foreign producers to question the legitimacy of a review request, awarding attorney's fees for baseless requests for review, increasing transparency and reducing agency discretion with regard to margin calculation methodology, creating provisions for judicial review of settlement agreements, relaxing the objectivity prong of the sham exception to the Neorr-Pennington doctrine in the trade context, etc. Such a comprehensive overhaul of the U.S. trade remedy legislation may not be realistic in the near future, however, especially given the current political economy.
Another seemingly viable solution that has recently been of much debate in the trade community is to move to a prospective duty collection system. Among the largest trading economies of the world, the United States is alone in its use of this retrospective AD duty collection system. Most other major economies use a prospective system by which the authorities set a duty rate that is levied on products coming into the country from that date forward. Any change in the rate is applied only to products coming in after the final determination is made. Under such a prospective duty collection system, there would be less room for perverse incentives to settle because the uncertainty is removed—a foreign producer's final rate for its imports into the U.S. is a known quantity at the border. Less risk of exposure, less incentive to settle. Accordingly, a settlement decision would be dictated more by a calculation of the merits of the dispute (a legitimate settlement incentive) rather than by unreasonable risks of a retroactive change of duty rates applied to goods brought into the United States and sold years earlier.
Moving to a prospective duty collection system would not resolve the issues raised with regard to the domestic industry, however. If the U.S. trade agencies were to simultaneously adopt a similar settlement protection provision to that given to class actions under Federal Rule of Civil Procedure 23(e), the benefits would be multifaceted. The provision would not only provide protections for the U.S. industry as a whole—which would better effectuate general antidumping trade policy—but it would also bring settlements within the purview of the U.S. government and most likely curb or bring to light any anti-competitive abuses that might fall under the Sherman Act.
Footnotes
1. See e.g., S&E.D.N.Y. R. 83.2; D. Me. R. 41.2.
2. See Mine Workers v. Pennington, 381 U.S. 657, 670 (1965); E. R. President's Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 138 (1961).
3. BE&K Constr. Co. v. NLRB, 536 U.S. 516, 526 (2002) (internal quotations omitted).
* Alexandra B. Hess is an associate in the International Trade Department of Hughes Hubbard and Reed LLP in Washington, D.C. This paper contains the individual views of its author and all errors are her own.
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