New Appellate Decision Holds That U.S. Antitrust Law Bars Civil, But Not Criminal, Actions Against Non-U.S. Cartel Members That Sold Price-Fixed Component of Finished Product Sold to U.S. Customers
The Foreign Trade Antitrust Improvements Act, 15 U.S.C. § 6a (FTAIA), enacted in 1982, has provided ambiguous direction to courts and practitioners regarding the applicability of U.S. antitrust laws to conduct occurring wholly or partially in other countries. In Motorola Mobility LLC v. AU Optronics Corp. et al., No. 14-8003 (7th Cir. Nov. 26, 2014) (Motorola Mobility II), the 7th U.S. Circuit Court of Appeals became the latest appellate court to weigh in on the meaning of this opaque statute, holding that purchases by a U.S. parent company's foreign affiliate of price-fixed goods that were incorporated into products subsequently shipped to the U.S. parent did not give rise to damages claims under Section 1 of the Sherman Act. At the same time, however, and in an apparent reversal of direction by the same panel, the Court made clear that its decision does not preclude efforts by the U.S. Department of Justice to pursue criminal charges against foreign defendants for cartel activity relating to components of finished products sold in the United States.
The FTAIA is written in cryptic terms and structured as an exception within an exception. It is not surprising, therefore, that it is more often paraphrased than quoted. The U.S. Supreme Court has described the FTAIA as placing all non-import activity involving foreign commerce outside the Sherman Act's reach, unless two conditions are met: (1) the foreign conduct sufficiently affects U.S. commerce, i.e., it has a "direct, substantial, and reasonably foreseeable effect" on U.S. domestic, import, or (certain) export commerce, and (2) the "effect" on U.S. commerce independently "giv[es] rise to" a claim by the plaintiff that is cognizable under the Sherman Act. See F. Hoffman-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004).
The FTAIA has proved difficult to apply in part because its concepts of "import" and "export" commerce, and the seemingly question-begging requirement that the "effect" of the conduct at issue support a Sherman Act claim, cannot easily be projected onto a commercial marketplace characterized by a worldwide supply chain including a plethora of "independent" entities organized into corporate families. Recent litigation has focused on the questions whether the challenged conduct involved "import" commerce, and therefore was outside the reach of the FTAIA; how to treat the importation of finished products containing price-fixed components; what relationship between an action outside the United States and an "effect" on U.S. commerce satisfies the requirement that such effect be "direct"; whether a U.S. indirect purchaser may sue under federal law because its foreign subsidiary company was the direct purchaser; and whether the requirement that a Sherman Act case involving foreign trade involve an "effect" on U.S. commerce that "give[s] rise to" a Sherman Act claim sets forth an independent geographic conduct test. All of these issues, and more, are implicated in the Motorola Mobility II case.
Motorola, based in Illinois, manufactures electronic devices, including mobile phones that contain LCD panels. Motorola's non-U.S. affiliates purchased LCD panels that it alleged were the subject of an international price-fixing conspiracy. The purchases of LCD panels fell into three categories: (1) purchases of LCD panels by Motorola that were delivered directly to Motorola facilities in the United States (Category I) (1 percent of the volume at issue); (2) purchases of LCD panels by Motorola's foreign affiliates that were delivered to the foreign affiliates' manufacturing facilities abroad, where they were incorporated into mobile phones that later were sold in the United States (Category II) (42 percent of the volume); and (3) purchases of LCD panels by Motorola's foreign affiliates that were delivered to the foreign affiliates' manufacturing facilities abroad and later were incorporated into mobile phones sold outside the United States (Category III) (57 percent of the volume). Motorola had negotiated prices for the LCD panels in part in the United States, and its foreign affiliates assigned their claims to Motorola.
The district court had ruled that Motorola's Category II and III purchases were barred by the FTAIA.[1] The court agreed with Motorola that defendants' conduct in negotiating with Motorola in the United States for LCD panel prices constituted domestic conduct, but found that conduct did not "give rise to" a domestic effect for purposes of Motorola's Sherman Act claim, because the relevant transactions were its overseas affiliates' purchases of the price-fixed LCD panels. "[B]ecause the economic consequences of Motorola's domestic approval of LCD prices were not felt in the U.S. economy, the domestic approval cannot constitute a domestic effect that gives rise to a Sherman Act claim." Motorola Mobility, Inc. v. AU Optronics Corp. et al., 2014 WL 258154 (N.D. Ill. 2014).
Motorola sought interlocutory review of the order granting partial summary judgment to the defendants. No opposition was filed and, as many readers of this note are aware, the Court of Appeals not only granted the petition for review but decided the appeal, without the benefit of briefing on the merits. Writing for a panel of the 7th Circuit, Judge Richard Posner's concise opinion affirmed the entry of partial summary judgment against Motorola, on three grounds: (1) the indirect sales of LCD panels in the United States, through their incorporation in cell phones, did not satisfy the FTAIA requirement that the U.S. injury be "direct"; (2) the allegedly inflated price charged by the foreign seller to the foreign subsidiary of Motorola did not create an effect that was cognizable under the Sherman Act; and (3) from a policy standpoint, adoption of Motorola's proposed theory of liability would dramatically increase the exposure of international sales transactions to the Sherman Act, a result that the Supreme Court had cautioned against in F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004).
Motorola sought rehearing en banc, and defendants of course opposed. Some amici urged the panel to stick with Judge Posner's decision, including foreign governments such as Japan, South Korea, Taiwan and Belgium. Other amici, including the United States government,[2] urged the panel to interpret the "direct effect" requirement to mean nothing more than a "reasonably proximate causal nexus," similar to what the 7th Circuit sitting en banc had used in Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845 (7th Cir. 2012). Confronted with an opinion that appeared both to bend the procedural and substantive rules of appellate review, and that apparently laid down a categorical exclusion of U.S. antitrust jurisdiction over cases where price-fixed products were incorporated into imported goods, the antitrust press and blogosphere lit up with a vast amount of commentary on both sides of the issue. The panel responded by vacating its decision and setting the case for briefing on the merits and argument, which took place on Nov. 13, 2014. The panel issued its decision less than two weeks later.
With the benefit of additional briefing, commentary, and time, Judge Posner, writing for the same panel that decided Motorola Mobility I, reaffirmed the panel's prior decision that Motorola had no Sherman Act claim for the Category II purchases, but did so using reasoning that differed from its prior opinion in one notable respect. Judge Posner began with a succinct summary of the two prongs of the FTAIA that must be satisfied:
There must be a direct, substantial, and reasonably foreseeable effect on U.S. domestic commerce—the American domestic economy, in other words—and the effect must give rise to a federal antitrust claim. The first requirement, if proved, establishes that there is an antitrust violation; the second determines who may bring a suit based on it. -Slip Op. at 4.
Judge Posner quickly concluded that Motorola had demonstrated the FTAIA was satisfied with respect to the Category I purchases that Motorola made in the United States, and equally quickly concluded that the FTAIA was not satisfied with respect to the Category III purchases that never entered the United States.
For the Category II purchases, Judge Posner concluded, as he had in Motorola Mobility I, that certain FTAIA requirements should be deemed capable of being satisfied, and thus were not amenable to disposition on a summary judgment motion. Thus, he found that if a price-fixed component was included in cell phones assembled overseas and sold to Motorola in this country "there would be an effect on U.S. commerce," which effects "could be substantial." Slip Op. at 5. Similarly, he found the requirement that the effect be "foreseeable" was satisfied "because the defendants knew that finished products sold in the United States would incorporate price-fixed components sold abroad." Id.
The final requirement, that the effect on U.S. commerce be "direct," remained to be addressed, and here Judge Posner departed most significantly from his analysis in Motorola Mobility I. In that opinion, he stated categorically that a "direct" effect on U.S. commerce could not follow from the importation of a finished product containing a price-fixed component even one step away from its direct sale. Now, however, he focused more on the Minn-Chem analysis, which reasoned that an effect in the United States cannot be "direct" as a matter of law if the price-fixing "filters through many layers and finally causes a few ripples in the United States." Id. at 6, quoting Minn-Chem, 683 F.3d at 860. He explained that in the present case, the effect on Motorola "might well be direct rather than 'remote,' the term we used in Minn-Chem, Inc. v. Agrium, Inc., supra, 683 F.3d at 856-57, to denote effects that the statutory requirement precludes." Slip Op. at 5. Noting that in Motorola's situation the effect on U.S. prices was "less direct" than it was in Minn-Chem—where the price-fixed commodity was sold to U.S. customers without intermediary—he declined nonetheless to presume conclusively that the minimal "direct effect" could not be shown. With all three components of the "effects test" unsuitable for summary disposition, Judge Posner "assumed" for purposes of the rest of the analysis that the test had been satisfied. Id. at 6.
That left the FTAIA's requirement that the alleged effect on import trade or domestic commerce "gives rise to" a Sherman Act claim. Judge Posner concluded that the Category II purchases did not satisfy that requirement, because the original purchasers of the price-fixed components were Motorola's foreign subsidiaries: "Whether or not Motorola was harmed indirectly, the immediate victims of the price fixing were its foreign subsidiaries ... and as we said in the Minn-Chem case, 'U.S. antitrust laws are not be used for injury to foreign customers,' 683 F.3d at 858." Slip Op. at 7. The Court's analysis was largely rooted in the facts that Motorola purposefully established subsidiaries in foreign countries to obtain favorable tax treatment, that the tax-driven choice of corporate domicile carried with it access to whatever remedies the foreign countries offered (or did not offer) for supposed wrongs, and that in other respects those companies are subject to, comply with, and can seek remedies under the laws of those countries. In short, the Court said, by pursuing antitrust claims in the United States rather than in the countries in which its subsidiaries purchased the price-fixed LCD panels, Motorola engaged in impermissible "forum shopping." Judge Posner also noted the "related flaw" that Motorola's U.S. parent was an indirect purchaser of the price-fixed goods, and thus did not have standing under Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), to bring Sherman Act claims. Slip Op. at 7. In the process, he rejected Motorola's effort to take advantage of Illinois Brick's permissive exception where the direct purchaser is owned or controlled by its customer. Here, even assuming a unity of identity between Motorola and its foreign affiliate, Judge Posner reasoned, the relevant transactions still occurred in foreign commerce. Slip Op. at 9-13.
The Court also discussed expressly the concerns raised by the United States that it not resolve the appeal in a way that "would interfere with criminal and injunctive remedies sought by the government against antitrust violations by foreign companies." See id. at 17. That indeed may well have been the consequence of the vacated Motorola Mobility I ruling—that importation of a finished product containing a price-fixed component could not generate a "direct effect" on U.S. commerce and therefore was immune from Sherman Act attack by anyone. The ruling in Motorola Mobility II would not similarly bind the U.S. government, as criminal prosecutions and injunctive actions are not subject to the limitations of Illinois Brick. But the Court in Motorola Mobility II had also cited international comity and concern over a hyper-expansion of Sherman Act jurisdiction in declining to adopt Motorola's proposed reading of the FTAIA, and it remained to be explained why those interests should not similarly limit government enforcement actions. The Court's answer was to accept the Justice Department's representation that it accommodates international comity concerns by "working out a 'modus vivendi' with foreign countries regarding the Department's antitrust proceedings against foreign companies." Id. at 18. In doing so, Judge Posner provided an extended quotation of a commentator's suggestion that the case be decided—as it was—to limit Sherman Act liability in civil cases for foreign defendants while preserving the ability of the United States government to pursue criminal prosecutions against them. This, together with the Court's revised analysis of the FTAIA's "direct effect" requirement, was a significant and important reworking of Judge Posner's original Motorola Mobility I ruling, which might have impeded the U.S. government's criminal enforcement of the Sherman Act against foreign companies.
The Motorola Mobility II decision represents the latest in a growing body of FTAIA case law that applies very strictly notions first articulated by the Supreme Court in Empagran that the U.S. antitrust laws exist only to protect U.S. markets. But it leaves in dispute fundamental questions as to the applicability of the "effects test," not only to cases where foreign cartels have fixed the prices of components used in finished products sold to U.S. customers, but also where the "directness" and "substantiality" of effects on U.S commerce are key. With many of the opinions reaching different conclusions, the stage is being set for Supreme Court review.
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[1] All parties and courts agreed that Class I claims (direct purchases of LCD panels by Motorola in the United States) satisfied the FTAIA's requirements.[2] The U.S. Federal Trade Commission, State Department and Commerce Department signed on to a brief submitted by the Department of Justice.