Lotes Co., Ltd. v. Hon Hai Precision Industry Co., No. 13-2280 (2nd Cir. June 4, 2014) [click for opinion]

This dispute concerned the development of the latest industry standard for USB connectors, known as USB 3.0. Plaintiff, a Taiwanese company, manufactures USB connectors in China. Defendants are a group of foreign companies that compete with Plaintiff in making and selling USB connectors. Plaintiff alleged that Defendants violated the agreement it made with a USB-standard setting organization promising to license technology on a reasonable and nondiscriminatory term when it filed patent infringement suits in China against two Chinese subsidiaries of Plaintiff. Plaintiff further alleged that Defendants attempted to leverage their ownership of the patents to gain control of the new technological standard for USB connectors and thereby gain monopoly power over the entire USB connector industry in violation of U.S. antitrust rules. Moreover, Plaintiff alleged that its lost sales and potential elimination as a competitor in China would “damage competition, increase prices, and harm consumers in the U.S.”

The district court dismissed the suit for lack of subject matter jurisdiction. In making the ruling, the district court followed Second Circuit precedent that the Foreign Trade Antitrust Improvements Act's ("FTAIA") limitations on antitrust claims involving foreign commerce are jurisdictional. The Second Circuit overruled its prior decision, concluding that the requirements of the FTAIA “go to the merits of an antirust claim rather than to subject matter jurisdiction.” Because the court held the requirements to be nonjurisdictional, it addressed whether Defendants waived those requirements through its standard-setting agreements. Citing a number of contractual provisions, the court affirmed that Defendants must abide by the Sherman Act to the extent it applied and ruled that the provisions did not waive any statutory requirements.

The FTAIA brings foreign conduct within the scope of the Sherman Act where the conduct has a “direct, substantial, and reasonably foreseeable effect” on U.S. domestic commerce that “gives rise to the claim under” the Sherman Act. 15 U.S.C. § 6(a). The district court followed the Ninth Circuit interpretation of “direct effect” that an effect is “direct” if it follows an immediate consequence. The Second Circuit disagreed, favoring a less stringent approach advocated by the U.S. and the Federal Trade Commission, holding that “the term ‘direct’ means only ‘a reasonably proximate causal nexus.’” The court noted that whether the causal nexus between foreign conduct and a domestic effect is sufficiently “direct” under the FTAIA in a particular case is a difficult question that will depend on many factors, including the structure of the market and the nature of the commercial relationships at each link in the causal chain, but declined to decide “the rather difficult question” because the effect did not “give rise to” Plaintiff’s claims.

Ultimately, the Second Circuit dismissed the suit on the ground that any domestic effect caused by Defendants’ foreign anticompetitive conduct did not “give rise to” Plaintiff’s claims because Plaintiff could not show the necessary causal connection. The court held that “the domestic effect must proximately cause the plaintiff’s injury,” but determined that the Defendants’ anticompetitive conduct did not proximately cause Plaintiff’s injury. The higher prices did not cause Plaintiff’s injury of being excluded from the market for USB 3.0 connectors; that injury flowed directly from Defendant’s exclusionary foreign conduct, which is “precisely the type of ‘independently caused foreign injury’” that falls outside of the statute’s intent. The court thus affirmed the judgment of the district court.