United States: How Direct Is Direct? Judge Posner Clarifies The Extraterritorial Scope Of The Antitrust Laws Via The "Direct" Effects Test Under The FTAIA

A recent decision from Judge Posner in the Seventh Circuit, Motorola Mobility LLC v. AU Optronics, offers the latest insight into the extraterritorial reach of the Sherman Act.  In dismissing Motorola's price-fixing claims of more than $3.5 billion, Judge Posner continued the clarification of the Foreign Trade Antitrust Improvements Act ("FTAIA"), by narrowing the conduct that constitutes a "direct" effect sufficient for a viable Sherman Act claim.

The FTAIA Imposes a Direct Effect Test for Foreign (Non-Import) Commerce to be Actionable Under the Sherman Act

The FTAIA, 15 U.S.C. § 6a, was enacted in 1982 to constrain the extraterritorial reach of the Sherman Act.1  In general, the FTAIA "remov[es] . . . (1) export activities and (2) other commercial activities taking place abroad" from the ambit of the Sherman Act "unless those activities adversely affect domestic commerce, imports to the United States, or exporting activities of one engaged in such activities within the United States." It requires that any otherwise qualifying anticompetitive conduct that involves non-import foreign commerce must exhibit "a direct, substantial, and reasonably foreseeable effect" on domestic commerce in order to state a viable claim under the antitrust laws.3  At length, the FTAIA provides:

 Sections 1 to 7 [of the Sherman Act] shall not apply to conduct involving trade or commerce (other than import trade or commerce) with foreign nations unless –

1) such conduct has a direct, substantial, and reasonably foreseeable effect –

A. on trade or commerce which in not trade or commerce with foreign nations, or import trade or import commerce with foreign nations; or

B. on export trade or export commerce with foreign nations, or a person engaged in such trade or commerce in the United States; and

2) such effect gives rise to a claim under the provision of sections 1 to 7 [of the Sherman Act].4

This language has left two issues open to active debate:  (i) whether the limitations set by the FTAIA are jurisdictional or substantive in nature and (ii) how "direct" any domestic effect must be in order for foreign conduct to fall inside the ambit of the antitrust laws.

The first question has been answered by the Supreme Court decisions of Arbaugh v. Y&H Corp.5 and Morrison v. National Australia Bank Ltd.6  Those decisions explained that courts should interpret a statute as jurisdictional where Congress has explicitly articulated it as such.  The Third Circuit's recent decision in Animal Science Products, Inc. v. China Minmetals Corp.7 applied this reasoning and found that the FTAIA's silence as to jurisdiction of the courts means it constitutes a substantive merits rather than a jurisdictional limitation, in effect creating an additional element to any Sherman Act claim involving foreign commerce.  Other courts have echoed this finding.8

Motorola & the "Direct Effects" Exception

Judge Posner's decision in Motorola Mobility, decided March 27, 2014, runs to the second of these questions.

Motorola's suit arises from a series of international investigations beginning in December 2006, when authorities in Japan, Korea, the European Union, and the United States opened probes into an international cartel among liquid-crystal display ("LCD") panel manufacturers to fix prices between 1999 and 2006.  LCD panels affected by the conspiracy were eventually incorporated into televisions and other electronic devices sold worldwide, including in the United States.  Criminal convictions followed, as eight companies plead guilty to the conspiracy and faced record fines.  Defendant AU Optronics Corp., for example, agreed to a $500 million fine with the United States Department of Justice.

As part of the civil litigation arising from the LCD price-fixing conspiracy, Motorola brought a follow-on civil action under the antitrust laws seeking roughly $3.5 billion in damages.  There, Judge Posner observed that only 1% of LCD panels were actually bought by Motorola, and the remaining 99% of the goods were purchased by Motorola's foreign subsidiaries, which were then (in less than half of the cases) incorporated into goods resold in America.  Id. at 2.

Relying on the FTAIA, Judge Posner dismissed the case, finding price fixing on a component part that is sold internationally but later resold to the United States fails to satisfy the FTAIA's requirement of a direct and foreseeable effect on United States commerce.  "[W]hat is missing from Motorola's case is a 'direct' effect.  The effect is indirect – or 'remote,' the term used in Minn-Chem Inc. v. Agrium, Inc. . . . to denote the kind of effect that the statutory requirement of directness excludes."  Id. at 4 (internal citations omitted).

As he later elaborated:

[The defendants] are selling [LCD panels] abroad to foreign companies (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, 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 US consumers.

Id. at 4-5 (underline added for emphasis) (internal citations omitted).9

In Minn-Chem, referenced by Judge Posner,the complaint alleged serious anticompetitive conduct abroad.  The Seventh Circuit borrowed the interpretation of the Department of Justice and Federal Trade Commission that direct means "a reasonably proximate causal nexus."10  However, the Court found that allegations of anticompetitive behavior abroad, and corresponding effect on foreign prices, depended on "uncertain intervening" actions it considered too speculative and unspecific to establish a direct and foreseeable effect on United States commerce.

Last week's Motorola decision squares with this interpretation.  It continues the winnowing of the extraterritorial reach of the Sherman Act, holding that price-fixing on a component good which is first sold abroad and then later incorporated into a good for resale in the United States does not create enough effect on domestic commerce to qualify as direct.  In the Seventh Circuit, at least, the test for foreign non-import commerce just got clearer.

Footnotes

1.See Pub. Law 97–290, Export Trading Company Act of 1982, H.R. Rep. 97–686, as reprinted in 1982 U.S.C.C.A.N. 2487, 2496 (stating that "The intent of the Sherman and FTC Act Amendments in H.R. 5235 is to exempt from the antitrust laws conduct [with foreign impact] that does not have the requisite domestic effects.").

2.F. HoffmanLa Roche Ltd. v. Empagran S.A., 542 U.S. 155, 161 (2004) (emphasis omitted).

3.15 U.S.C. § 6a.

4.Id.

5.546 U.S. 500 (2006) (holding that the numerical qualification contained in Title VII's definition of employer does create a subject-matter jurisdiction test).

6.130 S. Ct. 2869 (2010) (finding that the extraterritorial reach of § 10(b) of the Securities and Exchange Act of 1934 did not create a subject-matter jurisdiction test but rather was a merits question).

7.654 F.3d 462 (3d Cir. 2011).

8.See, e.g., Minn-Chem, Inc. v. Agrium Inc., 683 F.3d 845 (7th Cir. 2012) (en banc) (recognizing the Supreme Court's stance as discussed).

9.Perhaps in response to an amicus brief submitted by the Japanese Ministry of Economy, Trade and Industry, Judge Posner also noted the practical rationales limiting the extraterritorial application of the Sherman Act:

Many foreign manufacturers are located in countries that do not have . . . antitrust laws. . . . As a result, the prices of many products exported to the United States are elevated to some extent by price fixing or other anticompetitive acts. . . . The position for which Motorola contends would if adopted enormously increase the global reach of the Sherman Act, creating friction with many foreign countries and "resent[ment at] the apparent effort of the United States to act as the world's competition police officer," a primary concern motivating the foreign trade act.

Id. at 8 (internal citations omitted).

10.683 F.2d at 857.

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