In a widely awaited opinion, the Seventh U.S. Circuit Court of Appeals in Chicago has issued an opinion which affects the scope of government enforcement actions and which purchasers may pursue private civil treble damage actions under the U.S. Sherman Act when alleging price fixing on parts and products sold to global supply chains. Motorola Mobility LLC v. AU Optronics Corp, Case No. 14-8003 (7th Cir. November 26, 2014). The Court received briefs not only from the parties but also amicus briefs from the governments of the United States, Korea, Taiwan, Japan and Belgium as well as other private groups.

The United States was seeking to have the Court to clarify that it could pursue not only cartel members who price fix component parts and ship them into the United States, but also cartel members who price fix component parts which are incorporated into and raise the price of finished products manufactured or assembled abroad and shipped into the United States. There was no dispute that price fixed component parts shipped into the United States are within the import commerce exception under the Foreign Trade Antitrust Improvements Act (FTAIA) 15 U.S.C. Section 6a(1) and are covered by the Sherman Act.

In its opinion, the Court stated that it would assume that where the cartel members sold their components to foreign subsidiaries, which incorporated them into finished products and sold the finished products to Motorola for resale into the United States, the FTAIA requirement of a direct, substantial, and reasonably foreseeable effect on domestic commerce has been satisfied, and the conduct is covered by the Sherman Act. That brought the Seventh Circuit into alignment with the Second Circuit, which reached a similar result in Lotes Co. v. Hon Hai Precision Industry Co., 753 F.3d 395, 409-13 (2d Cir. 2014) (USB connectors incorporated into computers). Similarly, the Ninth Circuit, in the related criminal prosecution involving the same components, United States v. Hsiung, 758 F.3d 1074 (9th Cir. 2014) had held that a government prosecution could be based either on direct sales of price fixed components into the United States (import commerce theory) or upon sales of price fixed components into finished products that were sold in the United States or for delivery in the United States (domestic effects theory).

For private treble damages actions brought by purchasers, the FTAIA requires a second element: that the effects of anticompetitive conduct on domestic U.S. commerce give rise to the antitrust cause of action. 15 U.S.C. Section 6a(2). The Seventh Circuit found that Motorola did not satisfy that test for the components sold to its foreign subsidiaries, finding that the foreign subsidiaries suffered the effect of the anticompetitive conduct in the foreign countries where they were incorporated and had purchased the components, not in the United States. The Seventh Circuit found that they could not pursue a Sherman Act claim, and that they would have to pursue their remedies under the laws of those foreign countries where they were incorporated and purchased the components. The Second Circuit reached a similar result in Lotes, where the court found that the anticompetitive effect of the refusal to deal in that case occurred in China, not the U.S., barring the claim under the FTAIA.

The Seventh Circuit also found that the foreign subsidiaries were the direct purchasers of the price fixed components, and that Motorola and its customers were indirect purchasers of the price fixed components, which bars their claims under Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). In its amicus brief, the United States suggested that the court could adopt a rule that the first purchaser in affected U.S. commerce of a price fixed component part or finished product would be allowed to bring a claim against the price fixers of the component parts where the direct purchaser's claim would be barred by the FTAIA. Such a rule would enable U.S. purchasers of cellphones to bring claims against the price fixers of the component parts if the purchasers could establish that the prices of cellphones containing the component parts were thereby increased. It noted that absent such a construction, it is possible that no U.S. purchasers could recover damages under federal antitrust laws despite the tremendous harm in the U.S. threatened by offshore component price fixing. The U.S. brief cited authority for the proposition that the bar to indirect purchaser claims does not apply when there is no risk of double recovery or difficulty in apportioning damages, and noted that the Second Circuit recently described this as an open issue in the FTAIA context, Lotes, 753 F.3d at 413 n.7. Without either approving or disapproving that argument, The Seventh Circuit ruled that Motorola had waived it by focusing only on the overcharges paid on the component parts by the foreign subsidiaries and dropping the point that it paid more for the cellphones purchased from its subsidiaries.

With this ruling, it is becoming more clear, at least in the Circuit Courts of Appeal that have ruled, that the government can bring enforcement actions involving price fixed component parts shipped directly into the United States and also involving price fixed component parts incorporated into finished products shipped into the United States. Whether customers of price fixed components and finished products containing the components can bring private treble damages actions under the U.S. antitrust laws is dependent on whether they are located and made their purchases in the United States or in a foreign country. If they are indirect purchasers there may be a further obstacle unless the courts further clarify the scope of the indirect purchaser rule in such situations. From a practical perspective, the Seventh Circuit noted that U.S. manufacturers will need to decide whether to operate through foreign subsidiaries and whether to have those foreign subsidiaries purchase the component parts from foreign suppliers. The Court noted that if they wish to maintain their right to sue under U.S. antitrust laws, they must purchase the component parts directly through U.S. corporations or operate through foreign divisions as opposed to foreign subsidiaries.

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