The U.S. Justice Department is prosecuting a defunct Japanese company in a landmark case that attempts to apply U.S. criminal antitrust laws to the global market.

The prosecution of the former Nippon Paper Company on price-fixing charges marks the first time that U.S. antitrust lawyers have brought criminal charges against a foreign company for alleged misconduct that took place entirely outside the United States. In the past, the United States has prosecuted foreign companies for uncompetitive conduct on civil charges.

The alleged crimes that precipitated the Nippon Paper trial, according to prosecutors, took place when several Japanese paper makers got together three times in 1990 to discuss the falling price of fax paper in the United States. Prosecutors said the paper companies conspired to sell thermo fax paper to Japanese trading companies with the requirement that they market the paper at a specified price in the United States. The meetings, according to prosecutors, led to a 10-percent increase in the price of fax paper sold in the United States.

Nippon Paper has denied any wrongdoing. Its lawyer, Alan Cohen, said U.S. prosecutors crossed the line separating U.S. antitrust law from Japanese business culture. He said Japanese competitors regularly get together to discuss common issues in their industries. "A bunch of guys having tea in Tokyo is not a U.S. crime," he said. Two other Japanese companies, Mitsubishi Paper Mills and New Oji Paper Company, pled guilty to U.S. price-fixing charges in 1995 and paid fines totaling $3.55 million.

The amount of money involved in the alleged price rigging is not large. In 1990, North American sales of thermo fax paper by Japanese makers amounted to $120 million. Nippon Paper took about $6 million of that amount. Nippon Paper no longer exists as a separate entity. In 1993, it merged with Japan's Jujo Paper Company.

The Nippon Paper case came to trial in 1998 in a Boston courtroom with witnesses in Tokyo testifying via a video teleconference hookup. It resulted in a hung jury, with the jurors split 10-2. Justice Department officials say they are committed to retrying the case. No date for a new trial has been set.

U.S. prosecutors went all the way to the U.S. Supreme Court to win the right to try the case. In 1995, a federal judge threw out the indictment, saying U.S. antitrust law did not extend to Japan. He based his ruling on the concept of comity, the traditional respect countries give each other in allowing them to enforce their own laws against their own citizens.

The Justice Department got the ruling overturned in an appeal. "We live in an age of international commerce where decisions reached in one corner of the world can reverberate around the globe in less time than it takes to tell the tale. Thus, a ruling for Nippon would create perverse incentives for those who would use nefarious means to influence markets in the United States," wrote Judge Bruce Selya of the U.S. First Circuit of Appeals.

A decision by the U.S. Supreme Court to uphold the appeals court ruling drew protests from Nippon Paper and the Japanese government. "This ruling strains relations with foreign states and invites retaliatory action against U.S. companies," Nippon Paper said.

In the view of the government of Japan, "International cooperation in a global economy requires increased respect for territorial sovereignty." The Supreme Court decision "conflicts with settled international law."

Joel Klein, head of the U.S. Justice Department's Antitrust Division, said prosecuting the Nippon Paper case is vital to fighting international cartels that harm U.S. consumers.

"We need to be able to reach such cartels no matter where the cartel activity takes place," Klein said. "Otherwise, when companies that are members of a cartel sell products in the United States, we cannot fully protect American consumers against artificially inflated prices."

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Sources: American Bar Association Journal, International Commercial Litigation, Los Angeles Times, Metropolitan Corporate Counsel.

Economic Perspectives
USIA Electronic Journal, Vol. 4, No. 1, February 1999