Background
Opinion

Comment


A recent decision from the Seventh Circuit in Motorola v AU Optronics Corp has provided much-needed clarification on the scope of the Foreign Trade Antitrust Improvements Act. Specifically, the decision clarifies that US companies that conduct purchasing and manufacturing operations in foreign commerce are subject to the strictures of the act – just like any other company. The court's decision also has potentially important implications for the feasibility of state law indirect purchaser claims going forward.

Background

Enacted in 1982, the act governs the Sherman Act's application to foreign activity. The act removes from the Sherman Act's reach all commercial activity taking place abroad, unless the activity has a "direct, substantial, and reasonably foreseeable effect" on US or import commerce, and such effect "gives rise" to a claim under the Sherman Act. Only after both elements are satisfied will a Sherman Act claim based on foreign activities be recognised.

In its lawsuit, Motorola accused several liquid-crystal display (LCD) manufacturers of conspiring to fix the prices of the LCD panels it purchased for assembly into finished mobile phones. However, Motorola purchased only 1% of the LCD panels at issue in the United States. The remainder of the purchases allegedly subject to price fixing were made by Motorola's foreign manufacturing subsidiaries, primarily located in China and Singapore. These foreign panel purchases in turn fell into two separate categories:

  • purchases of panels abroad for incorporation into mobile phones that were sold in the United States (accounting for 42% of Motorola's claims); and
  • purchases of panels abroad for incorporation into mobile phones that were sold outside of the United States (57% of Motorola's claims).

The defendants sought summary judgment on all of Motorola's claims arising out of purchases of LCD panels made by its foreign subsidiaries. The defendants argued that these "foreign injury" purchases were barred by the act because Motorola could not show that an effect on US commerce gave rise to these claims.

As Motorola's claims were consolidated in the Northern District of California for pre-trial purposes, a multi-district litigation judge first decided the issue. The multi-district litigation court rejected the defendants' arguments and held that all of Motorola's foreign injury claims were cognisable under the Sherman Act. However, after the case was remanded to the Northern District of Illinois for trial, the defendants moved for reconsideration of the multi-district litigation court's denial of summary judgment. The trial court granted the motion for reconsideration and held that all of Motorola's foreign injury claims were barred by the act. The trial court certified its decision for immediate appeal.

Opinion

On March 27, in an opinion authored by Judge Posner, the Seventh Circuit granted Motorola's petition for interlocutory appeal and affirmed the trial court's ruling on the merits without further argument.

As to purchases of panels abroad for incorporation into phones sold outside the United States, the court held that these claims were "clearly barred" by the act.(1) These LCD panels "never entered the United States" in any form and therefore "never became domestic commerce" and "can't possibly support the Sherman Act claim".(2) The court called Motorola's arguments to the contrary "frivolous".(3)

As to purchases of panels abroad for incorporation into phones sold in the United States, the court held that these claims were also barred by the act for three reasons.

First, the court concluded that Motorola could not show a "direct" effect on US commerce as a result of its foreign subsidiaries' purchases.(4) The court reached this conclusion despite the fact that Motorola alleged that the defendants were aware that Motorola's foreign subsidiaries intended to incorporate some of the LCD panels into products sold in the United States.(5) The court explained that the alleged price fixers were not selling panels in the United States. Rather, they sold the LCD panels at issue abroad, to foreign companies (the Motorola subsidiaries), which in turn incorporated them into finished products (mobile phones) that were then exported to the United States for resale by the parent company (Motorola).(6) Therefore, any effect on US commerce as a result of this attenuated chain of commerce was "indirect" or "remote", and the "kind of effect that the statutory requirement of directness excludes".(7)

With respect to the 'directness' requirement, the Seventh Circuit specifically distinguished its prior decision in Minn-Chem, Inc v Agrium, Inc.(8) In Minn-Chem, foreign sellers unlawfully conspired to drive up the price of potash for sale in foreign markets, which prices were then used as a benchmark for sales to US customers. In that case, therefore, the effect on US import commerce was sufficiently direct. By contrast, Motorola's foreign injury claims were based on conduct in foreign commerce that "filters through many layers and finally causes a few ripples in the United States",(9) and therefore was insufficiently remote.

Second, the court explained that Motorola's claims failed for an additional reason – any effect on US commerce "could not give rise to an antitrust claim" on Motorola's part.(10) The court explained that the higher prices for the mobile phones that Motorola resold in the United States did not "give rise" to the foreign subsidiaries' antitrust claims. Motorola's foreign injury claims were based "not on any illegality in the prices Motorola charges" in the United States, "but rather on the effect of the alleged price fixing on Motorola's foreign subsidiaries".(11) Moreover, any "derivative injury" that the parent company might have suffered in the United States was irrelevant, because "derivative injury rarely gives rise to a claim under antitrust law, especially a claim by the owner of or an investor in the company that sustained the direct injury".(12) Hence, Motorola could not show that an effect on US commerce gave rise to its foreign injury claims.

Third, separate and apart from the statutory language, the court explained that the "expansive interpretation" of the act urged by Motorola would have "practical effects" that were "large and cut strongly against [Motorola's] position".(13) This is so because in today's economy, virtually every large corporation has a globalised supply chain with manufacturing and purchasing operations based outside the United States. The court noted that the Supreme Court had previously warned that "rampant extraterritorial application of U.S. law creates a serious risk of interference with a foreign nation's ability independently to regulate its own commercial affairs".(14) Therefore, one purpose of the act was to prevent "unreasonable interference with the sovereign authority of other nations".(15) Yet if the court were to adopt Motorola's expansive interpretation of the act, it would "enormously increase the global reach of the Sherman Act" and turn the United States into the world's competition police officer.(16) Motorola, the court concluded, was "oblivious" to these concerns.(17)

Comment

The Seventh Circuit's decision has two important implications for antitrust claims involving foreign commerce.

First, US companies that have manufacturing and purchasing operations offshore are subject to the strictures of the act just like any other firm operating in foreign commerce. That Motorola's foreign subsidiaries had assigned their claims to the US parent company, or that Motorola made pricing decisions for its foreign subsidiaries in the United States, was irrelevant. That the purchasing entities at issue were owned by a US parent company was also irrelevant. The court explained that:

"a corporation is not entitled to establish and use its affiliates' separate legal existence for some purposes, yet have their separate corporate existence disregarded for its own benefit against third parties."(18)

The court further explained that Motorola's foreign subsidiaries had remedies available under the "antitrust laws in the countries in which they do business".(19) If those remedies were less generous than the remedies available under the Sherman Act, then that was a risk that Motorola assumed "by deciding to do business in those countries".(20)

Second, the court's conclusion that there was no "direct" effect on US commerce as a result of component purchases abroad could have significant ramifications for the viability of indirect purchaser claims under state law. For example, in the thin-film-transistor liquid-crystal display multi-district litigation proceedings, a class of US consumers recovered over $1 billion in settlements. The claims in that case were based on purchases of finished goods (ie, televisions, computers and laptops) that contained LCD panels manufactured and sold in foreign commerce. If the act pre-empts state laws (a separate question not addressed in Motorola), then the court's opinion could spell serious trouble for indirect purchaser claims based on components sold in foreign commerce.

For further information on this topic please contact Derek F Foran or Stephen P Freccero at Morrison & Foerster LLP's San Francisco office by telephone (+1 415 268 7000), fax (+1 415 268 7522) or email (dforan@mofo.com or sfreccero@mofo.com). Alternatively, contact Christopher Sousa at Morrison & Foerster LLP's Washington DC office by telephone (+1 202 887 1500), fax (+1 202 887 0763) or email (csousa@mofo.com). The Morrison & Foerster website can be accessed at www.mofo.com.

Endnotes

(1) Slip op at 3.

(2) Id at 2.

(3) Id at 3.

(4) Id at 4.

(5) Id at 4.

(6) Id at 3.

(7) Id.

(8) 683 F3d 845 (7th Cir 2012) (en banc).

(9) Slip op at 5 (quoting Minn-Chem, 683 F3d at 860).

(10) Id at 6.

(11) Id.

(12) Id at 6.

(13) Id at 7.

(14) Id at 8 (quoting F Hoffman-La Roche Ltd v Empagran SA, 542 US 155, 165 (2004)).

(15) Id (quoting Empagran, 542 US at 164).

(16) Id.

(17) Id at 9.

(18) Id at 6 (quotation omitted).

(19) Id at 7.

(20) Id.