One of the hottest topics in cartel enforcement today is the question of how the Foreign Trade Antitrust Improvements Act of 1982 (“FTAIA”) limits the extraterritorial reach of the Sherman Act. The FTAIA applies to both governmental and private actions. On June 4, 2014 the Second Circuit offered its views on the subject in Lotes Co., v. Hon Hai Precision Industry, No. 13-2280, slip op. (2d Cir. June 4, 2014).

The Foreign Trade Antitrust Improvements Act of 1982 (“FTAIA”), 15 U.S.C. Section 6a, limits the extraterritorial reach of the Sherman Act. The Supreme Court has explained that the FTAIA initially lays down a general rule placing all (nonimport) activity involving foreign commerce outside the Sherman Act’s reach. The FTAIA then brings such conduct back within the Sherman Act’s reach provided that the conduct both (1) sufficiently affects American commerce, i.e., has a “direct, substantial, and reasonably foreseeable effect” on American domestic, import, or (certain) export commerce, and (2) has an effect of a kind that antitrust law considers harmful,i.e., the “effect” must “giv[e] rise to a [Sherman Act] claim.” F. Hoffmann‐La Roche Ltd. v. Empagran S.A., 542 U.S. 155, 162 (2004) (quoting 15 U.S.C. § 6a(1), (2)).  

In Lotes, a manufacturer of UBS connectors (Lotes), alleged monopolization by the defendants of the market for UBS 3.0 connectors. Lotes alleged that the defendants breached their obligation to provide RAND‐Zero licenses to adopters of the USB 3.0 standard, which included Lotes. This, Lotes claimed, gave the defendants unlawful monopoly power over the manufacture of USB 3.0 connectors in China. While the anticompetitive conduct took place in China, Lotes’s theory was that monopoly driven price increases in USB 3.0 connectors would “inevitably” be passed on to consumers in the United States. Lotes alleged, therefore, that the monopolization conduct in China would have a “direct, substantial, and reasonably foreseeable effect on U.S. commerce.”

The Second Circuit upheld the dismissal of the complaint because Lotes did not satisfy the second requirement under the FTAIA that “such effect gives rise to a claim under the provisions of this Act.” The effect in the United States from the defendants’ alleged conduct was claimed to be higher consumer prices. But, Lotes’s injury, as a competitor of the defendants, was that it was allegedly wrongly denied a license to manufacture the connectors.  Higher U.S. consumer prices did not give rise to Lotes’s antitrust injury. In fact, Lotes’s injury predated the higher prices. Lotes’s complaint therefore was dismissed because any domestic effect caused by the defendants’ foreign anticompetitive conduct did not “give[] rise to” Lotes’s claims. 15 U.S.C. § 6a(2). Lotes at 47.

There are several other important aspects to the Lotes decision:

1) The Second Circuit joined the Third and Seventh Circuit in holding that the requirements of the FTAIA were not jurisdictional, but were substantive elements of a Sherman Act offense. The importance of this holding is obvious. Motions to dismiss under Fed. R. Civ. P. 12(b)(1) based on lack of subject-matter jurisdiction place the burden on the plaintiff to establish jurisdiction.  The plaintiff must meet its burden before discovery takes place.  Instead, because satisfying FTAIA requirements is now considered an element of the Sherman Act violation, defendants must file a motion to dismiss under Rule 12(b)(6) and all reasonable inferences will be drawn in favor of the plaintiff.

2) The Second Circuit did not reach the issue of whether the defendants’ conduct met the FTAIA “direct, substantial and reasonably foreseeable effect” requirement, but did rule that the district court used the wrong test to answer this question.The district court construed the FTAIA’s “direct effect” element to require the effect to follow “as an immediate consequence of the defendant’s activity.”   This is the rule in the Ninth Circuit. The Second Circuit, however, rejected this test. The Court adopted an alternative approach advocated by the Department of Justice and the FTC in amicus briefs. Under this more relaxed approach“the term ‘direct’ means only ‘a reasonably proximate causal nexus.’” Lotes at 35-36. The Seventh Circuit has also adopted the “reasonably proximate causal nexus” test. See Minn-Chen v. Agrium, Inc., 683 F.3d 845 (7^th Cir. 2012).

While the Second Circuit did not reach the question of whether Lotes’s allegations of monopoly conduct in China met the “reasonably proximate causal nexus” the Court did note that, “This kind of complex manufacturing process is increasingly common in our modern global economy, and antitrust law has long recognized that anticompetitive injuries can be transmitted through multi‐layered supply chains.” Lotes at 43. The Court also observed that the “Supreme Court has held that claims by indirect purchasers are ‘consistent with the broad purposes of the federal antitrust laws: deterring anticompetitive conduct and ensuring the compensation of victims of that conduct.’” Lotes at 43, citing California v. ARC Am. Corp., 490 U.S. 93, 102 (1989).

3) It may be significant that the Second Circuit adopted the approach advocated by the DOJ and FTC that the “the term ‘direct’ means only ‘a reasonably proximate causal nexus’” and noted that this test may still be met even where the fixed-price product is manufactured overseas and becomes a component of a finished product that is later imported into the United States. By contrast, the Seventh Circuit recently found in Motorola Mobility v. AU Optronics, Case No. 14-8003, slip op. (7^th Cir. Mar. 27, 2014) that the FTAIA’s requirements were not met where prices were fixed on LCD screens that were sold to Motorola’s overseas subsidiaries and then incorporated overseas into cell phones that were then imported into the United States. TheMotorola Court held that the fact that the purchasers of the price-fixed products were located overseas meant that the effect was not “direct.” The court, per Judge Posner, stated:

The effect on component price fixing on the price of the product of which it is a component is indirect, compared to the situation in Minn-Chem where “foreign sellers allegedly created a cartel, took steps outside the United States to drive the price up of a product that is wanted in the United States, and then (after succeeding in doing so) sold that product to U.S. customers.”

Continued at Robert E. Connolly’s Cartel Capers Blog