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

On June 4, 2014, the U.S. Court of Appeals for the 2nd Circuit issued an important decision regarding the limits that the Foreign Trade Antitrust Improvements Act, 15 U.S.C. § 6a (FTAIA) places on the extraterritorial application of the Sherman Act. Lotes Co., Ltd. v. Hon Hai Precision Industry, Co., Ltd., et al., No. 13-2280 (2d Cir).

Lotes and the defendants are members of a trade group that produced a technical standard, USB 3.0, for a new generation of USB devices. All participants in the trade group agreed 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 tried to secure for the defendants a dominant position that would result in higher USB prices worldwide, including in the United States. Lotes did not claim that it paid higher prices for licenses or products in the United States. Lotes appealed to the 2nd Circuit after the district court dismissed its complaint based on the FTAIA.

The FTAIA places all (non-import) activity involving foreign commerce outside the Sherman Act's 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 U.S. commerce effect "giv[es] rise to" a claim by the plaintiff that is cognizable under the Sherman Act.

The 2nd Circuit held that: (1) the requirements of the FTAIA are substantive and not jurisdictional, so it cannot be used to challenge subject matter jurisdiction; (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 U.S. courts under the Sherman Act.

For a more complete discussion and analysis of the Lotes decision and the FTAIA, see Orrick's client alert on the decision, available here. The Lotes decision itself is available here.

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