FTAIA and Foreign Sales: Seventh Circuit Limits Extraterritorial Reach of U.S. Antitrust Law in Motorola Mobility v. AU Optronics - Foreign Trade Antitrust Improvements Act
In Motorola Mobility LLC v. AU Optronics Corp., -- F.3d --, No. 14-8003, 2014 WL 1243797 (7th Cir. Mar. 27, 2014), the U.S. Court of Appeals for the Seventh Circuit set precedent in the growing body of law interpreting the Foreign Trade Antitrust Improvements Act (FTAIA), 15 U.S.C. § 6a, a statute that limits the extraterritorial application of U.S. antitrust law. Judge Posner, writing for the court in this opt-out LCD flat panel antitrust litigation, held that the FTAIA bars suits alleging the price fixing of component parts (LCD displays) sold and integrated abroad into final products (cellphones) eventually imported to and sold within the United States because such price fixing fails the FTAIA’s “direct effects” test. See Motorola Mobility LLC, 2014 WL 1243797 at *2-4. The court also held that such price fixing failed another independent FTAIA requirement that the effect of the defendant’s practice must “give rise to” an antitrust claim in the United States. Id. at *3-4.
Judge Posner’s decision is critically important in today’s global economy; “[n]othing is more common nowadays than for products imported to the United States to include components that the producers had bought from foreign manufacturers.” Id. at *4. Despite a circuit split as to the precise meaning of “direct” in the FTAIA (a split relevant in other contexts), Motorola Mobility provides much-needed clarity: the extraterritorial reach of U.S. antitrust law does not extend to claims based on the anticompetitive conduct of foreign actors innon-U.S. sales of component parts, even if the defendant(s) know those components will be integrated into products eventually sold in the United States, and even if a U.S. entity determined the components’ purchase price on behalf of its foreign subsidiary.
The FTAIA and “Direct” Effects
The FTAIA first sets a general rule that the Sherman Act does not apply to conduct “involving” non-import trade or commerce with foreign nations, but then creates a “domestic injury” exception, under which foreign anticompetitive conduct is subject to U.S. antitrust law if it (1) “has a direct, substantial, and reasonably foreseeable effect” on U.S. commerce, and (2) “such effect gives rise” to the plaintiff’s claim. See 15 U.S.C. § 6a (emphasis added).
The Seventh and Ninth Circuits have employed different standards to determine whether an effect of foreign anticompetitive conduct was “direct” under the FTAIA. In LSL Biotechnologies, the Ninth Circuit established a strict test for directness: “an effect is ‘direct’ if it follows as an immediate consequence of the defendant’s activity” i.e., it proceeds “without deviation or interruption.” United States v. LSL Biotechnologies, 379 F.3d 672, 680 (9th Cir. 2004) (emphasis added) (citing Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 618 (1992)). The Seventh Circuit’s Minn-Chem opinion, on the other hand, held that an effect is direct if it bears a “reasonably proximate causal nexus” with the foreign anticompetitive conduct, i.e., the effect is not “too remote.” Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845, 856-57 (7th Cir. 2012) (en banc).
In Motorola Mobility, the Seventh Circuit sidestepped the split, instead taking a pragmatic approach to the FTAIA’s “direct effect” requirement.
Motorola sued several foreign manufacturers of liquid-crystal display (LCD) panels, alleging that they fixed the prices of panels Motorola and its foreign subsidiaries purchased and incorporated into cellphones. On interlocutory appeal from a district court order dismissing 99 percent of Motorola’s claims, the Seventh Circuit considered three distinct categories of purchases: (1) LCD panels bought by and delivered to Motorola in the United States (about 1 percent of purchases); LCD panels bought by, paid for and delivered to Motorola’sforeign subsidiaries, which incorporated the panels into cellphones that were either (2) never shipped to the United States (about 57 percent of purchases) or (3) subsequently shipped to the United States (about 42 percent of purchases). Motorola Mobility LLC, 2014 WL 1243797 at *1.
The court summarily addressed the first two categories: (1) Claims concerning the 1 percent of panels sold and delivered in the United States to Motorola (as opposed to its foreign subsidiaries) are subject to U.S. antitrust law, because these sales are “import” commerce unaffected by the FTAIA’s bar. Id. at *2. Conversely, (2) the 57 percent of panels sold and incorporated abroad into cellphones “never entered the United States, so never became domestic commerce,” and therefore represented “a frivolous element of Motorola’s claim” that is “clearly barred by the [FTAIA] from challenge under the Sherman Act.” Id. at *1-2.
The court’s analysis of (3) the remaining 42 percent of LCD panel purchases focused on whether the foreign price fixing “has a direct, substantial, and reasonably foreseeable effect” on U.S. commerce in light of the fact that those component parts were incorporated into cellphones later sold in the United States. See id. at *2. The court acknowledged that “[t]here was … doubtless some effect [on U.S. commerce]; and it was [presumably] foreseen by the defendants,” but held that Motorola could not establish a “direct effect.” Id. Rather, the effect here was indirect or “remote.” Id. The court reasoned:
The alleged price fixers are not selling the panels in the United States. They are selling them abroad to foreign companies (the Motorola subsidiaries) that incorporate them into products that are then exported to the United States for resale by the parent. The effect of component price fixing on the price of the product of which it is a component is indirect … [and this] is closer to the situation in which we said the [FTAIA] would block liability under the Sherman Act: the “situation in which action in a foreign country filters through many layers and finally causes a few ripples in the United States.”
Id. (emphasis added) (citing Minn-Chem, 683 F.3d at 856-57).
Motorola argued that the effect was “direct” because it, as a U.S. company, determined the prices its foreign subsidiaries paid for the panels. The court dismissed this argument, reasoning that whether the U.S. company directly purchased the panels and resold them to foreign subsidiaries for use in manufacturing products later sold in the United States, or the foreign subsidiaries negotiated the price charged by the cartel to Motorola, “the effect on prices in the United States would be the same … it would be the cartel price. And so the (indirect) effect on U.S. domestic commerce (the sale of the cellphones in the United States) would be the same.” Id. at *3.
The court gave two additional reasons for dismissing Motorola’s claims concerning the 42 percent of panels. First, those claims were independently barred by the FTAIA requirement that the domestic effect “gives rise to” an antitrust claim. Finding a lack of causation, Judge Posner reasoned that “[t]he ‘effect’ of the alleged price fixing on [U.S.] commerce in this case is mediated by Motorola’s decision on what price to charge U.S. consumers for the cellphones manufactured abroad that are alleged to have contained a price-fixed component.” Id. At bottom, Judge Posner viewed the claims here as a U.S. parent company’s backdoor attempt to assert claims actually belonging to its non-U.S. subsidiaries, where those subsidiaries’ claims would be barred by the FTAIA:
Motorola’s claim against the defendants is based not on any illegality in the prices Motorola charges (in which event Motorola would be suing itself …), but rather on the effect of the alleged price fixing on Motorola’s foreign subsidiaries. … [But] “U.S. antitrust laws are not to be used for injury to foreign customers.” The subsidiaries are “foreign customers,” being fully subject to the laws of the countries in which they are incorporated and operate—and “a corporation is not entitled to establish and use its affiliates’ separate legal existence for some purposes, yet have their separate corporate existence disregarded for its own benefit against third parties.”
Id. (internal citations omitted).
Finally, the court considered “the practical stakes in the expansive interpretation” of the FTAIA urged by Motorola in a global economy where “products imported to the United States [commonly] include components that the producers had bought from foreign manufacturers.” Id. at *4. The court reasoned that Motorola’s interpretation “would enormously increase the global reach of the Sherman Act, creating friction with many foreign countries [who “do not have or, more commonly, do not enforce antitrust laws, or whose antitrust laws are far more lenient than ours”] and [would create] ‘resentment at the apparent effort of the United States to act as the world’s competition police officer,’ a primary concern motivating the [FTAIA].” Id. (citations and brackets omitted). Judge Posner concluded by recognizing the Supreme Court’s warning “that rampant extraterritorial application of U.S. law ‘creates a serious risk of interference with a foreign nation’s ability independently to regulate its own commercial affairs,’” and that the FTAIA “was intended to prevent such ‘unreasonable interference with the sovereign authority of other nations.’” Id. (citing F. Hoffmann–La Roche Ltd. v. Empagran S.A., 542 U.S. 155, 164-65 (2004)).
In recent years, the United States has experienced a substantial increase in the number of criminal investigations and civil complaints concerning alleged cartel activity involving components sold in foreign markets that reach U.S. markets only after being incorporated into finished products. Authored by Judge Posner—one of the federal bench’s most prominent judges and antitrust scholars—the Seventh Circuit’s Motorola Mobility decision could have immediate and far-reaching consequences for many pending and future civil and criminal cases, particularly where the price fixing of component parts in foreign markets is at issue. See, e.g., Lotes Co. Ltd. v. Hon Hai Precision Industry Co., Case No. 13-2280 (2nd Cir.); United States. v. AU Optronics Corp., Case No. 12-10550 (9th Cir.).
Regardless of whether future courts adopt the Ninth Circuit’s “immediate consequences” test or the Seventh Circuit’s “proximate causation” test for the FTAIA’s “direct effects” requirement, one thing is clear: the FTAIA bars antitrust suits over restraints in foreign markets for inputs used abroad to manufacture downstream products subsequently imported into the United States. At least in the Seventh Circuit, such restraints neither “immediately” nor “proximately” cause domestic effects because the effect of those restraints first “filters through many layers [before] finally caus[ing] a few ripples in the United States.” Id. at *2. As a result, antitrust plaintiffs challenging foreign conduct will face even greater difficulty avoiding the FTAIA’s bar.