On May 14, 2013, District Judge Shira A. Scheindlin granted defendants Hon Hai Precision Industry, Co., Foxconn International Holdings, Inc., Foxconn Electronics, Inc. and Foxconn (Kunshan) Computer Connecter Co., Ltd.’s (collectively “defendants”) motion to dismiss plaintiff Lotes Co., Ltd’s Sherman Act antitrust claims. Defendants and Lotes make and sell Universal Serial Bus (“USB”) connectors to manufactures of computer products. Both parties are members of an agreement that establishes a set of industry wide standards for USB technology. The standards enable necessary compatibility and interoperation of computer goods and drive continued growth within of the USB market. The agreement also requires signatories to grant a non-exclusive, world-wide license to their patented technology that falls within the USB standards at a royalty-free or on a reasonable and non-discriminatory (“RAND”) basis. However, defendants refused to provide licenses for certain patents which fall within the standards to Lotes, and instead filed infringement actions in China. In the instant action, Lotes claims defendants’ refusal to provide a RAND license and the filing of patent infringement suits in China violate the Sherman Act.

Judge Scheindlin quotes the Third Circuit Court of Appeal’s decision in Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (3d Cir. 2007) and explains that without RAND licensing, individual rights holders could demand exorbitant terms for licenses to patents that are essential to industry-wide standards—creating anti-competitive effects and hindering the progression of technology. The court states that the Sherman Act provides for both civil remedies and criminal penalties for, among other things, conspiracies to restrain trade, monopolization, attempted monopolization, and conspiracies to monopolize. However, conduct that only causes foreign injury is excluded from the Sherman Act by the Foreign Trade Antitrust Improvements Act of 1982 (“FTAIA”). Here, the court noted that neither party manufactures or directly sells any USB connectors in the U.S. Therefore, the court examined the domestic-injury exception to the FTAIA which makes the Sherman Act applicable where foreign conduct significantly affects US commerce. The court applied the Second Circuit’s ruling in Filitech S.A. v. France Telecom S.A. that the “FTAIA forbids the exercise of jurisdiction over Sherman Act violations relating to foreign trade or commerce . . . unless the conduct complained of has a ‘direct and substantial, and reasonably foreseeable effect’ on domestic commerce,” and held that the defendants’ refusal to issue Lotes RAND licenses and patent enforcement proceedings in China did not have a direct, substantial or reasonably foreseeable effect on domestic commerce. Any effects of defendants’ conduct on the U.S. market are not linked to the relevant market in China, and any anti-competitive effects in the U.S. are simply too attenuated to establish the proximate causation required by the FTAIA. Thus, the court granted defendant’s motion to dismiss Lotes’ Sherman Act claims for lack of subject matter jurisdiction.

Judge Scheindlin noted that lower courts within the Second Circuit have considered the jurisdictional issue and have cast doubt on the Filitech holding. However, the court noted that while the current thinking in the Southern and Eastern Districts of New York may “point against finding the FTAIA to be jurisdictional” the court was bound by precedent.

Case: Lotes Co., Ltd. v. Hon Hai Precision Indus. Co., Ltd., No. 12 Civ. 7465 (SAS), 2013 BL 128091 (S.D.N.Y. May 14, 2013)