Today, the Second Circuit will hear argument in an important case on the extent that foreign injury (reduced foreign sales and closure of foreign plants) arising from foreign RAND breaches can have remedy in the U.S. based on their impact on U.S. commerce.  The case, Lotes Co., Ltd. V. Hon Hai Precision Industry Co., Ltd., et al. (13-2280), concerns whether a Taiwanese corporation’s breach of contract and antitrust claims arising from standard setting obligations were rightly dismissed under the Foreign Trade Antitrust Improvements Act (FTAIA), which bars Sherman Act claims to conduct involving export or wholly foreign commerce except where that conduct has a “direct, substantial, and reasonably foreseeable effect” on U.S. commerce.

In the fall of 2012, Lotes sued Hon Hai, Hon Hai subsidiary Foxconn and several other related entities in S.D.N.Y. for reneging on licensing commitments made to the USB Implementers Forum (USB-IF) (see our February post for a full recap). Lotes asserts that, not only did defendants breach contracts with the USB-IF by failing to license USB 3.0-related patents on FRAND-Z terms (i.e., royalty free), but defendants also violated U.S. antitrust laws by instituting foreign patent-enforcement proceedings against Lotes in China given its FRAND-Z obligations. Defendants moved to dismiss, arguing that the FTAIA deprived the court of jurisdiction to adjudicate antitrust claims based on the alleged foreign activity. The district court found the entirely foreign activity did not have the type “direct” impact on U.S. consumers to fall within an FTAIA exception. The case was dismissed. Lotes appealed.

The FTC recently filed an amicus brief urging the Second Circuit to affirm the dismissal on alternative grounds without endorsing what it called “the District Court’s Flawed Analysis of Direct Effect”. Arguing that “direct” within the FTAIA refers to a “reasonably proximate causal nexus” rather than an “immediate consequence”, the FTC asserts that the district court was wrong to dismiss the action based on no “direct” effect on U.S. commerce because a foreign manufacturing process involving multiple transactions or steps may have a direct effect on U.S. Commerce.

Rather than affirming dismissal on that grounds, the FTC recommends affirming dismissal of Lotes’ antitrust claims “on the simpler basis” that Lotes cannot show that the alleged effect on U.S. commerce gives rise to the claims.  Rather, the FTC argues Lotes has alleged the reverse — that the foreign injury gave rise to the effect on U.S. commerce: “Lotes suffered only foreign injury from lost sales of USB 3.0 connectors in wholly foreign commerce and the potential closures of its foreign factories; that injury results from defendants’ conduct, not its effect on U.S. commerce.”  Thus, “[t]o the extent Lotes alleges any causal connection between its injury and the effects on U.S. commerce, the line of causation runs in the wrong direction.”

Whereas the Sherman act requires that the adverse effect on U.S. commerce be the direct and proximate cause of the plaintiff’s injury, Lotes alleged its foreign injury (lost sales, potential closure of foreign factories) will have an adverse effect on U.S. commerce (price increases to USB 3.0 connector purchasers).  As such, the FTC argued relief cannot be granted under the FTAIA.  The Second Circuit has invited the FTC to present oral argument on this specific alternative ground.