United States: 2nd Circuit Decision In Lotes Clarifies FTAIA’s Effect On The Extraterritorial Reach Of The Sherman Act, But Leaves Unresolved The Status Of Claims Based On Importation Of Products Containing Price-Fixed Components

Long-simmering issues concerning the applicability of the Sherman Act to foreign conduct under the Foreign Trade Antitrust Improvements Act, 15 U.S.C. § 6a (FTAIA), were addressed in the June 4, 2014 decision of the 2nd U.S. Circuit Court of Appeals in Lotes Co., Ltd. v Hon Hai Precision Industry, Co., Ltd, et al., No. 13-2280 (2d Cir. June 4, 2014). Decisive in tone but offering limited guidance for the future, the decision addresses several issues for which there are inconsistent decisions—or at least a lack of consensus—among the courts of appeals and the district courts. The question of the Sherman Act's extraterritorial reach is of increasing importance as private litigation over international cartel conduct remains very active, and claims of injuries in the U.S. attributable to competitive conditions outside the country become more and more a hallmark of the global supply chain. Lotes is the first of three appellate decisions regarding the FTAIA expected this year or next year; the others are from the 9th Circuit in United States v. Leung,1 and from the 7th Circuit in Motorola Mobility,2 where various parties have sought en banc reconsideration of an opinion discussed below.

The Holdings in Lotes

In Lotes, the 2nd Circuit held that (1) the requirements of the FTAIA are substantive and not jurisdictional; (2) foreign anticompetitive conduct can meet the FTAIA's "direct, substantial, and reasonably foreseeable effect" test so long as there is a "reasonably proximate causal nexus between the conduct and the effect"; (3) under the facts pleaded in the case, the FTAIA's test that the effect "gives rise to a claim under" the Sherman Act was not satisfied; and (4) a private agreement suggesting that the Sherman Act would apply to the parties' relationship did not constitute a "waiver" of elements of the FTAIA or otherwise allow suit in the U.S. courts under the Sherman Act.

***

Background

Plaintiff Lotes is a Taiwanese corporation that designs and manufactures Universal Serial Bus (USB) connectors that are components in computers, smartphones, computer peripherals and other electronic devices. Defendants are a group of companies that compete with Lotes in the design and manufacture of USBs, but also produce devices (such as personal computers and peripherals) that incorporate USBs. Lotes and the defendants are members of a trade group that produced a technical standard, USB 3.0, for a new generation of USBs. All participants agreed as a condition of their membership in the standard-setting organization to make available to all other members royalty-free, reasonable and nondiscriminatory (RAND-Zero) license terms for any patents required to satisfy the new standard. Lotes alleged that the defendants breached their obligations to provide RAND-Zero licenses and took steps—including marketplace communications and patent infringement suits in China—to marginalize Lotes as a potential competitor and to secure for the defendants a dominant position that would result in higher USB prices worldwide, including in the U.S. Lotes sued the defendants in U.S. district court in New York, and appealed to the 2nd Circuit after its case was dismissed based on the FTAIA.

The FTAIA

The Delphic language of the FTAIA has been construed by the U.S. Supreme Court to place all (non-import) activity involving foreign commerce outside the Sherman's Act reach, but then makes such foreign conduct subject to the Sherman Act provided that both (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.3

The 2nd Circuit's decision addressed these principal questions: (1) whether the FTAIA provisions above are jurisdictional or, alternatively, are elements that a plaintiff must prove in order to recover; (2) what relationship between conduct and an effect in the U.S. is implied by the term "direct;" (3) whether foreign monopolization conduct that allegedly causes injuries overseas satisfies the "gives rise to" requirement; and (4) whether venue and other agreements made by the defendants as a condition of their participation in the standard-setting trade group constituted a waiver of certain of the statutory requirements. The 2nd Circuit ruled as follows:

1. The FTAIA Is Substantive, Not Jurisdictional

A threshold question addressed by the Court involved the framework under which FTAIA-based challenges to complaints are analyzed. Courts have wrestled for years with the question whether the FTAIA is jurisdictional or merely substantive. While not affecting the meaning of the provisions, the answer to the question may profoundly affect the course of litigation, among other reasons because of the potential availability of motions to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1), and differences in the scope of discovery. The 2nd Circuit had held in 1998 that the FTAIA's requirements are jurisdictional.4 In light of more recent Supreme Court decisions, however, the Lotes panel overruled the circuit law and held that the requirements of the FTAIA are substantive rather than jurisdictional.

2. The "Direct, Substantial, and Reasonably Foreseeable Effect" Test Should Be Given a Flexible Meaning

The Court's decision focused on the meaning of the term "direct" in the statutory requirement that to be actionable in the U.S., foreign anticompetitive conduct must have a "direct, substantial, and reasonably foreseeable effect" on commerce in the U.S. Courts have applied two different tests for assessing whether foreign conduct had a "direct" effect on commerce in the U.S. The 9th Circuit has taken a strict approach, holding that "an effect is 'direct' if it follows as an immediate consequence of the defendant's activity."5 The 7th Circuit, however, sitting en banc, has taken a more functional approach, concluding that "the term 'direct' means only that 'a reasonably proximate causal nexus'" exists between the conduct and the injury in the U.S., whether or not the effect is "immediate."6 The U.S. Department of Justice and the Federal Trade Commission have advocated using the latter test, seeking rulings that would aid the Government in connection with enforcement efforts against international cartels.

The 2nd Circuit agreed with the 7th Circuit and the DOJ/FTC, explaining, among other things, that reading "direct" as "immediate" would render the "reasonably foreseeable" language in the statute superfluous: "To demand that any domestic effect must follow as an immediate consequence of a defendant's foreign anticompetitive conduct would all but collapse the FTAIA's domestic effects exception into its separate import exclusion."[7] Accordingly, the Court adopted the "reasonably proximate causal nexus" test, explaining that courts "will have to consider all of the relevant facts, using all of the traditional tools courts have used to analyze questions of proximate causation."[8] Importantly, the Court did not proceed to determine whether the allegations in Lotes's complaint satisfy this standard, leaving its decision technically dictum. Rather, the Court based its decision on the complaint's failure to satisfy a different FTAIA requirement, discussed below.

3. The "Gives Rise to a Claim" Test Should Be Given a Literal Interpretation

The Court ultimately dismissed the complaint based on its failure to satisfy the FTAIA's requirement that the domestic effect "give[] rise to a claim under" the Sherman Act. It explained that the plain meaning of that language is that the FTAIA is not satisfied unless the foreign conduct causes a domestic effect that in turn is the proximate cause of the plaintiff's injury. Lotes did not satisfy the test, because even though it alleged that the defendants' foreign conduct resulted in higher consumer prices in the United States, those prices were not the injury that Lotes allegedly suffered. To the contrary, Lotes complained of injury from being excluded from the market for USB 3.0 connectors, which flowed from the defendants' alleged foreign exclusionary conduct and not from higher consumer prices in the United States.9 The Court also rejected Lotes's argument that it suffered domestic injury based on its allegation that defendants' refusal to license certain claims of certain U.S. patents foreclosed competition in the U.S., finding the allegations relating to U.S. patents to be trivial in the context of the acts alleged.

4. Private Agreements on Applicability of the Sherman Act Do Not Override the FTAIA

Finally, the Court considered the question whether private agreements that the defendants entered into in connection with global standard-setting activities to comply with the Sherman Act, and to have disputes heard in U.S. courts, operated as a waiver of any argument that the alleged breaches of those agreements were not within the scope of suits that may be brought under the FTAIA. The Court concluded that such provisions merely expressed rules to be followed if the Sherman Act otherwise was applicable and thus that no waiver had occurred. But the Court's broad and at times confusing suggestion that parties' private agreements could be deemed to waive requirements of the FTAIA because it is not jurisdictional may generate its own share of litigation.

***

Impact of the 2nd Circuit's Lotes Decision

The scope of the FTAIA is being heavily litigated in antitrust cases throughout the United States, most commonly in the many international price-fixing cases pending in district courts around the country. At a high level, the Lotes decision will help plaintiffs to the extent it adds to the weight of authority that the FTAIA is not jurisdictional. In other words, while defendants may still move to dismiss complaints that fail to allege the FTAIA elements, plaintiffs will cite Lotes to argue that such motions may not be brought in the context of challenges to a court's jurisdiction, in which early, special-purpose discovery may be brought to bear on the question. More complaints may proceed to merits discovery as a result, increasing defense costs and the likelihood of settlements.

On the merits, the 2nd Circuit's construction of the requirement that an effect on U.S. commerce be "direct" also favors plaintiffs. Many claims at issue in FTAIA cases involve U.S. purchases of products that incorporate components that were the subject of alleged price-fixing activity abroad. The Lotes decision may help plaintiffs in these cases, because it adds to the authority that the FTAIA does not impose a bright-line rule requiring an "immediate" effect that could be used to dismiss cases involving multi-level production chains. On this point, though, the fact that the Lotes case did not involve alleged price fixing of a component, and the 2nd Circuit's decision not to apply the law to the facts of the case, leave open what may be the most significant issue in current FTAIA jurisprudence. In April 2014, Judge Richard Posner wrote an opinion for the 7th Circuit in Motorola Mobility10 holding categorically that the requirement that a U.S. injury be "direct" precluded claims arising from allegedly inflated prices for LCD screens incorporated into cell phones sold in the U.S., because the LCD screens first were purchased by Motorola's overseas subsidiaries. Motorola is seeking en banc review, and the U.S. government is supporting Motorola, arguing that the decision is inconsistent with the 7th Circuit's decision in Minn-Chem, which the 2nd Circuit (in part at the U.S. government's request) adopted in Lotes. Judge Posner thought Minn-Chem distinguishable, but it is apparent that view is not universally held, and that many important questions remain unanswered in connection with how the "reasonably proximate causal nexus" test will be applied.

As noted above, the 2nd Circuit's decision in Lotes is the first of three anticipated appellate decisions regarding the FTAIA. The United States has filed briefs in the 7th Circuit Motorola Mobility case and the 9th Circuit Leung case expressing concerns about limiting the scope of the FTAIA. In the Motorola Mobility case, the governments of Korea, Japan, and Taiwan have filed briefs or statements expressing concerns about an expansive application of the FTAIA, and the 7th Circuit has asked the United States to submit a brief addressing international comity concerns. Given the importance of the proper interpretation and application of the FTAIA—and the inconsistency in how courts are interpreting and applying it—the issues are well on their way to being teed up for petitions for review by the Supreme Court.

The 2d Circuit's decision is available here. For more information on recent decisions relating to the extraterritorial application of the antitrust laws, as well as extraterritoriality issues in many other U.S. practice areas, please click here to visit the homepage of The World in US Courts: Orrick's Quarterly Review of Decisions Applying US Law To Global Business and Cross-Border Activities.

Footnotes

1 No. 13-10242 (9th Cir.).

2 Motorola Mobility LLC v. AU Optronics Corp., 746 F.3d 842 (7th Cir. 2014).

3 F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S 155, 162 (2004).

4 Filetech S.A. v. France Telecom S.A., 157 F.3d 922 (2d Cir. 1998).

5 United States v. LSL Biotechnologies, 379 F.3d 672, 680 (9th Cir. 2004).

6 Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845, 857 (7th Cir. 2012) en banc).

7 Slip op. at 40.

8 Id. at 44.

9 Cf. Empagran SA v. F. Hoffmann-LaRoche, Ltd., 417 F.3d 1267, 1271 (D.C. Cir. 2005) (injury must be proximately caused by the domestic effects).

10 See n.2, supra

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.