The extent to which foreign conduct can run afoul of the US antitrust  laws remains an unsettled question. Cases related to that question  were recently before three US appellate courts. In one of the three,  the Second Circuit issued an opinion that makes it easier to apply US  antitrust laws to anticompetitive conduct that occurs outside the US. In  Lotes Co., Ltd. v. Hon Hai Precision Industry Co., No. 13-2280, slip op.  at 2 (2d Cir. June 4, 2014) (Lotes), the Second Circuit Court of Appeals  interpreted the Sherman Act’s provisions relating to foreign trade.  While the opinion leaves many unanswered questions, it is likely that  the effect of the decision will be to make it easier for litigants in the US  to bring claims against companies for conduct outside the US.

The Foreign Trade Antitrust Improvements Act

The Lotes case is the most recent of a number of cases working their  way through the appellate courts that are focused on the Foreign  Trade Antitrust Improvements Act (FTAIA), 15 U.S.C. § 6a. The FTAIA  is a Sherman Act amendment that limits the statute’s ability to reach  conduct outside the US. After the FTAIA, foreign conduct can lead  to a Sherman Act violation only if: (1) the foreign conduct relates to  commerce imported into the US; or (2) the foreign conduct (a) has  a “direct, substantial, and reasonably foreseeable effect” on US  commerce, and (b) “gives rise to a claim” under the Sherman Act. 15  U.S.C. § 6a. It is the second prong of the FTAIA test, known as the  domestic injury exception, that was the subject of the Lotes appeal and  has been the subject of litigation in other circuit courts. In addition to  the Lotes opinion by the Second Circuit, the Seventh Circuit recently  issued an opinion addressing the FTAIA in Motorola Mobility LLC v. AU  Optronics Corp., 746 F.3d 842 (7th Cir. 2014). A decision by the Ninth  Circuit is pending in United States v. AU Optronics Corp.

Lotes Co., Ltd., a manufacturer of computer components including USB  connectors, brought Sherman Act claims against two competitors,  Hon Hai Precisions Industry Co., Ltd. and Foxconn International  Holdings, Ltd., and certain affiliates. Lotes alleged its competitors,  foreign companies with foreign manufacturing operations, prevented  Lotes from being able to manufacture new USB 3.0 connectors. Lotes  claimed that the defendants refused to license needed technology  to Lotes, contrary to prior commitments made by the defendants to  license on reasonable and non-discriminatory terms. One or more of  the defendants also brought patent infringement suits against Lotes  in China based on Lotes manufacture and sale of USB connectors.  These connectors are incorporated into numerous electronic products  (such as laptops and mobile devices) by companies in China, that  assemble finished goods that are later sold in the US. Lotes alleged  that the refusal to license combined with the patent infringement suit  constituted anticompetitive conduct in violation of the Sherman Act.

The district court dismissed Lotes’s antitrust claims finding the alleged  conduct did not lead to a “direct effect” in the US. In the district court’s  view, there was not a sufficiently direct link between the market  for USB connectors in China, which plaintiffs claimed was being  monopolized, and the market for electronic products in the US that use  USB connectors that the plaintiffs claimed was affected by the conduct.  Applying the standard used by the Ninth Circuit in United States v.  LSL Biotechnologies, 379 F.3d 672, 680 (9th Cir. 2004), the district  court found that the conduct in China did not have the “immediate  consequences” in the US required to be a direct effect under the FTAIA.

The Second Circuit, at the urging of the US Department of Justice and  the Federal Trade Commission as amicus curae, rejected the district  court’s view of what constitutes a direct effect under the FTAIA. The  court found the Ninth Circuit’s immediate consequences test to be too  limiting. Instead, the court applied the test used by the Seventh Circuit  in Minn‐Chem, Inc. v. Agrium, Inc., 683 F.3d 845 (7th Cir. 2012). Under  the Minn-Chem standard, “direct” means only a reasonably proximate  causal nexus. 683 F.3d at 857. Although the district court, in finding no  directness, gave weight to the USB connectors’ being manufactured  and assembled into finished products in China, the Second Circuit  was persuaded that “[t]his kind of complex manufacturing process is  increasingly common in our modern global economy” and such a multilayered supply chain can transmit antitrust injuries. Lotes, No. 13-2280,  slip op. at 43.

Although the Second Circuit found that the foreign manufacturing and  assembly of the product could meet the FTAIA’s directness requirement,  the court ultimately affirmed the district court’s dismissal of the action.  Despite explaining the directness standard of proximate causation, the  court did not address whether the facts in Lotes were sufficient to meet  that standard. Instead, the Second Circuit upheld dismissal because  the plaintiffs were unable to meet the second prong of the domestic  injury exception – that the foreign conduct gave rise to the injury  alleged in the US. The court found that Lotes alleged the defendants’  foreign conduct drove up the prices of consumer electronics in the US,  but Lotes’s alleged injury was its exclusion from the market for USB  connectors. The foreign conduct did not give rise to that alleged injury  and therefore did not meet the second prong of the FTAIA domestic  exception.

Looking Forward

The Lotes decision comes on the heels of the Seventh Circuit’s March  27, 2014, decision in Motorola Mobility. In that matter, the Seventh  Circuit took a more restrictive approach to the domestic exception of  the FTAIA. That court found that foreign conduct by manufacturers of  LCD components, purchased by foreign subsidiaries of U.S. companies  and assembled abroad into products sold into the US lacked a “direct  effect” and did not “give rise to” a Sherman Act claim. 746 F.3dat  845 (citing Minn‐Chem, Inc., 683 F.3d at 856-57) (motion for en banc  review pending). The Seventh Circuit reasoned that the foreign LCD  components had only an “indirect” or “remote” effect on US domestic  commerce, insufficient to satisfy the directness requirement of the  statutory domestic injury exception. Id. at 844-45. The Ninth Circuit will  likely have more to say on the FTAIA when it decides the AU Optronics matter pending before it.

Given the somewhat conflicting reasoning by the Seventh and Second  Circuits, there is not clear guidance on when a corporation’s foreign  conduct may be subject to the Sherman Act. The more closely the  conduct can be tied to an effect in the US, the more likely the conduct  will come within the reach of the Sherman Act. More guidance from  the courts is needed on how close that connection must be to come  within US law. Given the importance of the issue and the somewhat  differing pronouncements by the circuit courts, the question of the  extent of the FTAIA’s extraterritorial reach may be headed to the  Supreme Court.