United States: District Court Follows Motorola Mobility To Apply FTAIA And Indirect Purchaser Doctrine To Dismiss U.S. Parent's Price-Fixing Claims Based On Its Foreign Subsidiary's Purchases

David M. Goldstein, Richard Goldstein, Robert Reznick and Elena Kamenir

The Seventh Circuit's decision in Motorola Mobility v. AU Optronics1–which blocked a U.S. parent's Sherman Act claim based on its foreign subsidiary's purchases of a price-fixed product–continues to reverberate throughout federal district courts. A district court in the Sixth Circuit recently followed Motorola Mobility to dismiss a U.S. company's price-fixing claims based on its foreign subsidiary's purchases of allegedly price-fixed components that were incorporated abroad into finished goods that the subsidiary then shipped to the United States. In re Refrigerant Compressors Antitrust Litigation, No. 2:09-md-02042, 2016 WL 6138600 (E.D. Mich. Oct. 21, 2016). The district court's decision demonstrates that, post-Motorola Mobility, defendants have strong arguments in some circuits under the Foreign Trade Antitrust Improvements Act ("FTAIA")2 and Illinois Brick3 to defeat a U.S. parent's price-fixing claims based on purchases by its overseas subsidiary, especially where that subsidiary is not wholly-owned.

The FTAIA

The FTAIA is a complicated statute that limits the extraterritorial reach of the Sherman Act. The U.S. Supreme Court has attempted to simplify the analysis by explaining that the FTAIA places 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. F. Hoffman-La Roche Ltd. v. Empagran S.A., 542 U.S. 155, 159 (2004). Import commerce (importing goods directly from foreign nations) is not subject to the FTAIA, i.e., such commerce is within the reach of the Sherman Act. Courts have struggled over the past several years to determine how the FTAIA applies in the context of a non-U.S.-based price-fixing conspiracy.

Motorola Mobility

The Seventh Circuit wrestled with the FTAIA in Motorola Mobility. Motorola, which is based in the United States, asserted a Sherman Act claim based on its wholly-owned foreign subsidiaries' purchases of price-fixed LCD screens that were incorporated into mobile phones that were manufactured abroad and then shipped to the United States. Motorola maintained that it could bring a Sherman Act claim because it negotiated prices for the LCD screens in the United States and its foreign subsidiaries had assigned their claims to Motorola.4 Nonetheless, the Seventh Circuit held that Motorola could not bring a Sherman Act claim based on its foreign subsidiaries' purchases.5 The court found that even if Motorola could satisfy the FTAIA's "direct, substantial, and reasonably foreseeable effect" test based on the eventual shipment of the mobile phones into the United States, it could not satisfy the "gives rise to a claim" test because its foreign subsidiaries–not Motorola itself–were the direct purchasers of the LCD panels and, under Illinois Brick, were the only parties with a viable Sherman Act claim.6

Refrigerant Compressors

The fact pattern in Refrigerant Compressors is similar to that in Motorola Mobility. General Electric ("GE") opted out of a direct purchaser class and brought a Sherman Act claim against Danfoss, an alleged member of a cartel that fixed prices for refrigerant compressors.7 GE based some of its claims on purchases of refrigerant compressors by its 48%-owned Mexican manufacturing subsidiary, MABE.8 Although GE had minority representation on MABE's board of directors and a veto right over some categories of board decisions, GE did not control MABE's operations.9 GE did, however, participate in negotiations with Danfoss "on behalf of itself and MABE" concerning the price of refrigerant compressors.10 Those purchase negotiations routinely took place at GE's appliance division headquarters in the United States.11 GE also argued that the MABE's purchases fell within the Illinois Brick "control exception," which under some circumstances may allow an indirect purchaser to assert a Sherman Act claim if "the direct purchaser is owned or controlled by its customer."12

When Danfoss moved to dismiss the complaint, the court requested additional briefing on whether the FTAIA barred GE's claims based on MABE's purchases of compressors, including whether GE had standing to sue for damages that MABE allegedly suffered from its purchases of the price-fixed compressors.13

The district court held that the FTAIA barred GE's claims based on MABE's purchases.14 It noted the many factual similarities to Motorola Mobility: a foreign subsidiary, foreign conspirators, foreign sellers, foreign points of sale, foreign delivery locations, foreign manufacturers, and similar transactions (purchase and sale of products).15 The court first found that the refrigerant compressors were purchased outside the United States and therefore did not qualify as import commerce (and were therefore subject to the FTAIA).16 Next, the court, like the Seventh Circuit in Motorola Mobility, concluded that even if GE could show a "direct, substantial, and reasonably foreseeable effect" on U.S. commerce, GE could not show that this effect gave rise to a Sherman Act claim for GE in the United States because MABE was the foreign direct purchaser of the compressors.17

As did the Seventh Circuit in Motorola Mobility, the district court also held that GE's claims based on MABE's purchases were barred by Illinois Brick and did not satisfy the control exception.18 Under Sixth Circuit precedent, the control exception is satisfied only when the relationship exhibits "such functional economic or other unity between the direct purchaser and either the defendant or the indirect purchaser that there effectively has been only one sale."19 Although GE was involved in negotiating MABE's purchases, the court found that GE's relationship with MABE did not meet the "functional economic or other unity" requirement.20

Takeaways

The Seventh Circuit's decision in Motorola Mobility remains one of the leading recent appellate decisions interpreting and applying the FTAIA in the context of overseas price-fixing conspiracies.21 Under Motorola Mobility, the FTAIA and Illinois Brick provide a substantial defense against a U.S. parent's Sherman Act price-fixing claims based on its foreign subsidiary's purchases of the allegedly price-fixed goods. The court's decision in Refrigerant Compressor suggests the following takeaways to supplement Motorola Mobility:

  • Minority ownership of the subsidiary, representation on the subsidiary's board of directors, and participating in purchase negotiations on behalf of the subsidiary are likely not enough to thread the FTAIA and Illinois Brick needles.
  • It is unlikely that a U.S. parent can solve this problem by obtaining an assignment of its foreign subsidiary's direct purchaser claims. The Third Circuit recently held that a subsidiary can assign its direct purchaser claim to an indirect purchaser as long as it is written and express, even without obtaining consideration for the claim.22 But a subsidiary trying to assign a Sherman Act claim must have one to begin with. In the context of a foreign price-fixing conspiracy, the foreign subsidiary of a U.S. parent is subject to its local laws and, therefore, may not provide a basis for the parent to assert a Sherman Act claim.
  • The analysis is more complicated in states that have enacted Illinois Brick-repealer statutes. In those states, a U.S. parent might be able to circumvent Illinois Brick by suing under state antitrust law. However, defendants still may be able to use the FTAIA to block a state law indirect purchaser claim.23
  • Finally, an investor in a company that is harmed by an antitrust violation cannot bring a Sherman Act claim stemming from its stock ownership because its harm is considered derivative, rather than direct.24 Thus, a U.S. parent that is a partial owner of a foreign subsidiary that suffers antitrust injury does not have antitrust standing to bring an antitrust claim on that ground.

Footnotes

1 746 F.3d 842 (7th Cir. 2014) ("Motorola Mobility II"), amended by, 775 F.3d 816 (7th Cir. 2015) ("Motorola Mobility III").

2 15 USC § 6a.

3 Illinois Brick v. Illinois, 431 U.S 720 (1977).

4 Motorola Mobility I, No. 09 C 6610, 2014 WL 258154, at *1, *3 (N.D. Ill. Jan. 23, 2014).

5 Motorola Mobility III, 775 F.3d at 827.

6 The Seventh Circuit also rejected Motorola's argument that the FTAIA's exception for "import commerce" applied, reasoning that the exception saves a Sherman Act claim only where an importer-plaintiff is purchasing from the defendant directly rather than through intermediate purchasers. Motorola Mobility III, 775 F.3d 818-19. A more in-depth discussion of Motorola Mobility is available here on our blog AntitrustWatch.com.

7 In re Refrigerant Compressors Antitrust Litig., 2016 WL 6138600, at *1-2.

8 Id. at *2-3, *8.

9 Id. at *9.

10 In re: Refrigerant Compressors Antitrust Litig., No. 2:09-md-02042 (E.D. Mich. Feb. 15, 2013), Dkt. 1, Complaint at 16.

11 Id. at 17.

12 See Illinois Brick, 431 U.S. at 736 n.16; In re Refrigerant Compressors Antitrust Litig., 2016 WL 6138600, at *9.

13 In re Refrigerant Compressors Antitrust Litig., 92 F. Supp. 3d 652, 658 (E.D. Mich. 2015).

14 In re Refrigerant Compressors Antitrust Litig., 2016 WL 6138600, at *8.

15 Id. at *7.

16 Id. at *8.

17 Id. (quoting Motorola Mobility III, 775 F.3d at 818).

18 Id. at *9.

19 Id. (quotingJewish Hosp. Ass'n of Louisville, Ky v. Stewart Mech. Enters., 628 F.2d 971, 975 (6th Cir. 1980)).

20 Id.

21 The other recent leading FTAIA appellate decision is United States v. Hsiung, 778 F.3d 738 (9th Cir. 2015). It is important to be familiar with the Ninth Circuit's analysis in Hsiung. Recently, a court in the Northern District of California, relying on Hsiung, declined to follow Motorola Mobility's test for "gives rise to" a claim. In re Cathode Ray Tube (CRT) Antitrust Litig., MDL No. 1917, No. C-07-5944 (N.D. Cal. Sept. 30, 2016), Dkt. 4919, Order on Motions for Summary Judgment Concerning the FTAIA, at 9 n.4. For a discussion of Motorola and Hsiung, click here for Orrick's article published in Japan's JCA Journal.

22 Wallach, et al. v. Eaton Corp., et al., No. 15-3320, 2016 WL 4791849 (3d Cir. 2016). Click here for a discussion of Wallach on our blog, AntitrustWatch.com.

23 A court in the Northern District of California recently noted that the FTAIA may limit state indirect purchaser statutes in the same way that it limits the Sherman Act: "District court opinions have in general declined to find that state competition laws cast a wider net than the FTAIA", and that "[s]ome state courts have reached the same conclusion." In re Capacitors Antitrust Litig., No. 3:14-cv-03264 (N.D. Cal. Sept. 30, 2016), Dkt. 1302, Order re Phase I of Summary Judgment on Foreign Transactions, at 12-13 (citing cases). The court noted that the plaintiffs had "not cited any federal or state decisions that extend the reach of a state law beyond the FTAIA, and the Court declines to do so here." Id. at 13.

24 See Motorola Mobility III, 775 F.3d at 820-21 (citing Mid–State Fertilizer Co. v. Exchange Nat'l Bank of Chicago, 877 F.2d 1333, 1335–36 (7th Cir. 1989)).

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