In a decision that may have far-reaching implications for the limits of the United States antitrust laws for conduct affecting businesses and consumers abroad, the Seventh Circuit Court of Appeals recently held that a United States company (Motorola) could not bring a claim under Sherman Act Section 1, 15 U.S.C. § 1, arising from its foreign subsidiaries’ purchases of products abroad from an alleged price-fixing cartel. Motorola Mobility LLC v. AU Optronics Corp., No. 14-8003, 2014 WL 1243797 (7th Cir. Mar. 27, 2014). Instead, writing for a unanimous panel, Judge Posner stated that the Foreign Trade Antitrust Improvements Act (FTAIA), 15 U.S.C. § 6a(1)(A), meant what it said: the Sherman Act is limited to conduct that has a “direct, substantial, and reasonably foreseeable effect” on domestic trade and only when that direct domestic effect “gives rise to” the plaintiff’s claim. It was thus irrelevant that the U.S. parent negotiated the prices paid by its foreign subsidiaries and that the cartel members allegedly knew that many of the products they sold abroad would be subsequently incorporated into finished products sold in the United States. The FTAIA’s “direct” effects requirement could only be satisfied if the alleged overcharge was paid (or other harm suffered) by an entity engaged in domestic (or import) commerce.
Motorola alleged that foreign suppliers of liquid crystal display (LCD) panels used in mobile phones fixed prices in violation of the Sherman Act. Motorola’s case began as part of multi-district litigation in the Northern District of California filed in the wake of a lengthy Department of Justice investigation that resulted in multiple criminal pleas, convictions, and large fines. The defendants, alleged members of the cartel, moved for summary judgment under the FTAIA as to all claims based on sales made outside the United States. The Northern District of California denied the motion, holding that a jury could find domestic effects based on pricing decisions for LCD panels that took place in the United States. In re TFT–LCD (Flat Panel) Antitrust Litig., No. M 07-1827 SI, 2012 WL 3276932 (N.D. Cal. Aug. 9, 2012). Motorola, however, opted out of the coordinated proceedings to pursue an individual case in the Northern District of Illinois, where defendants moved for reconsideration of the FTAIA order. The district court granted the motion and granted summary judgment in favor of the defendants.
Motorola claimed purchases of over $5 billion from the cartel, but the district court and the Seventh Circuit found that only 1% of those LCD purchases were clearly actionable under the Sherman Act because they were made directly by Motorola from the alleged cartel members and delivered to the U.S. The remaining 99% of purchases were made by Motorola’s foreign subsidiaries and used to manufacture phones abroad; 57% of these phones were then sold abroad, while 42% were shipped to Motorola and sold in the United States. The Seventh Circuit found that Motorola’s claims arising from the phones sold abroad were clearly foreclosed by FTAIA: the Sherman Act does not apply to foreign purchases of allegedly price-fixed inputs that are incorporated into finished products sold outside the United States. Motorola’s claims arising from the phones it sold in the United States presented a closer call, however, and raised a significant legal question under the FTAIA.
According to the Seventh Circuit, the direct impact of defendants’ price fixing was borne by Motorola’s foreign subsidiaries outside the United States when they paid inflated prices for LCD screens. Any subsequent impact on the price of mobile phones imported into the United States by Motorola was therefore “indirect” and barred by the FTAIA. The Court distinguished such a chain of sales (and, thus, alleged effects) from the facts in Minn-Chem, Inc. v. Agrium, Inc., where the Seventh Circuit held that the FTAIA permitted claims based on the “direct” impacts of a foreign cartel that “sold [its] product to U.S. consumers.” 683 F.3d 845, 860 (7th Cir. 2012) (en banc). In addition, the Court found that the “domestic effect” of the alleged cartel on United States commerce (higher mobile phone prices paid by U.S. consumers) did not “give rise to” Motorola’s antitrust claim (which was based on Motorola’s payment of higher LCD prices). Judge Posner noted that Motorola’s expansive interpretation of the FTAIA would create the risk of Sherman Act liability for any foreign company that forms a link in a global supply chain that ultimately sells into the United States, a result antithetical to the purposes of the FTAIA and well-established principles of comity with foreign nations.
Last week’s decision is consistent with other decisions that have held a hard line on “direct” U.S. effects under the FTAIA. For example, in United Phosphorus, Ltd. v. Angus Chemical Co., plaintiffs claimed that antitrust injuries rendered them unable to sell chemicals to Indian purchasers, which impacted the sales of drugs made from those chemicals into the United States. 131 F. Supp. 2d 1003 (N.D. Ill. 2001). The district court held that the FTAIA “explicitly bars antitrust actions alleging restraints in foreign markets for inputs . . . that are used abroad to manufacturer downstream products . . . that may later be imported into the United States.” The Seventh Circuit affirmed. 322 F.3d 942 (7th Cir. 2003) (en banc), overruled on other grounds by Minn-Chem, Inc., 683 F.3d at 845.
Likewise, in United States v. LSL Biotechnologies, the Department of Justice brought Sherman Act Section 1 claims against two international developers of genetically-modified foods that agreed via an Israeli arbitration settlement not to license modified strands of tomatoes without the other’s approval. 379 F.3d 672, 675 (9th Cir. 2003). The government’s theory of harm was that modified tomato seeds would have been sold into Mexico and grown into tomatoes, which would then be sold across the border. The Ninth Circuit Court of Appeals held that this theory was too attenuated to amount to a “direct” domestic effect. Instead, it relied on a contemporaneous definition of the term “direct” as “proceeding from one point to another in time or space without deviation or interruption,” as well as recent Supreme Court cases interpreting “direct effect” in the context of the Foreign Sovereign Immunities Act to mean an effect that “follows as an immediate consequence of the defendant’s activity.”
A pair of cases out of the District of Delaware similarly dismissed claims arising from foreign sales of foreign-made inputs that were then incorporated into products sold in the United States. In Advanced Micro Devices, Inc. v. Intel Corp., 452 F. Supp. 2d 555 (D. Del. 2006), a U.S. company claimed injury in large part because its foreign subsidiaries allegedly sold fewer microprocessors to foreign computer manufacturers as a result of the monopoly conduct of defendant, a U.S. microprocessor rival. The court dismissed this claim, finding that the direct effect from the alleged monopolization occurred abroad. In a subsequent decision, the court also dismissed the claims of U.S. computer buyers who alleged they paid supra-competitive prices for computers containing monopolized microprocessors. In re Intel Corp. Microprocessor Antitrust Litigation, 476 F. Supp. 2d 452 (D. Del. 2007).
While the recent Motorola decision is in line with these prior decisions, its timing and stature—including Judge Posner’s authorship of the opinion—may carry substantial implications for antitrust actions involving allegations of price-fixing of components initially sold outside the United States. The LCD litigation is just one of several major international price-fixing actions involving foreign manufacturers of components that are sold abroad and then incorporated into finished products that are imported into the United States. Judge Posner’s decision could result in the dismissal of many of these claims.
This decision may also have ramifications for criminal cases brought under these circumstances. For example, AU Optronics, a Taiwanese company, and two of its executives have appealed convictions arising out of the same alleged price-fixing conspiracy as in Motorola, arguing in part that the government failed to show a direct domestic effect from their sales of LCD panels to foreign customers who incorporated them into computer monitors sold into the U.S. That case remains pending, though the Ninth Circuit recently granted bail to the executives after oral argument, perhaps signaling a willingness to embrace the defendants’ arguments and reverse. We expect a decision shortly which could impact all multinationals selling outside the United States that get caught up in cartel investigations or litigation.
A copy of the opinion can be found here.