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What's Next For International Cartel Cases?
Law360, New York (December 20, 2013, 12:34 PM ET) -- Earlier this month, a Ninth Circuit panel granted bail pending appeal to two Taiwanese electronics executives convicted of antitrust violations under U.S. law for conduct that occurred overseas and appears to have directly affected foreign customers who subsequently re-sold product into the U.S. The court had rejected a previous motion for bail. Now, after hearing oral argument on the merits of the consolidated appeals in United States v. AU Optronics Corporation, the court has concluded the defendants “raised at least one ‘fairly debatable, or fairly doubtful’ question of law or fact” that could overturn their convictions. While the court gave no indication of which question or questions it considered important, the ruling may signal that the court is prepared to limit the extraterritorial reach of U.S. antitrust law. This would represent a significant development that should be closely watched by all companies operating and selling product outside the U.S. that is ultimately exported into the U.S. In recent years, courts have grappled with the question of what connection foreign conduct must have to U.S. commerce to permit enforcement of U.S. antitrust law. The Sherman Act can apply to foreign conduct only if it has a direct effect on U.S. domestic or import commerce and that direct domestic effect “gives rise to a claim” under U.S. antitrust law. But three decades after the passage of that restriction, the meaning of “direct effect” remains up for debate. In two current federal appeals, the Department of Justice has articulated a clear position on the statute’s operation. The U.S. Department of Justice’s position and the alternative, adopted by the majority of circuits that have addressed the issue, raise important questions that will affect the reach of U.S. antitrust law and, with it, the risks of $100 million-plus cartel fines and months of prison time for companies and executives outside the U.S. Background The Foreign Trade Antitrust Improvements Act defines the extraterritorial reach of the Sherman Act and limits the situations in which U.S. antitrust law applies to foreign conduct. In particular, foreign conduct may fall under the Sherman Act if it “has a direct, substantial, and reasonably foreseeable effect” on U.S. domestic or import commerce. In F. Hoffmann-La Roche Ltd. v. Empagran SA, the U.S. Supreme Court further explained that foreign customers of price-fixed goods purchased outside the U.S. could not pursue a claim in the U.S. because the direct domestic effects did not give rise to those plaintiffs’ injuries. But the court did not specifically address how “direct” the domestic effects must be to fall within the FTAIA’s exception. Courts have since interpreted “direct” in two different ways.
The Ninth Circuit’s 2004 decision in United States v. LSL Biotechnologies defined “direct” as “follow[ing] as an immediate consequence of the defendant's activity.” In 2012, the en banc Seventh Circuit rejected this definition in Minn-Chem Inc. v. Agrium Inc., and instead adopted the Department of Justice’s preferred formulation that “direct” means “a reasonably proximate causal nexus.” As the court noted, the DOJ has been advocating this latter definition at least since its briefing in LSL nearly a decade ago. The Supreme Court has yet to weigh in on this circuit split, but the issue continues to be litigated in both criminal and civil contexts. The Department of Justice continues to lobby for the broader reading of the statute. The DOJ Position In the pending Ninth Circuit case mentioned above, the electronics company AU Optronics (AUO) cites the LSL standard as justification to reverse its criminal conviction. The government charged AUO and its executives with fixing the prices of liquid crystal display panels that were sold to computer and television manufacturers for incorporation into products that would be sold in the U.S. The AUO defendants argue that the government failed to prove the required “immediate consequence” since the products were sold overseas and only came into the U.S. as part of other products. As a result, they explain, any effect on U.S. commerce within the meaning of the FTAIA stemmed from actions taken by the manufacturers of those other products, not AUO. Defending the convictions, the Department of Justice brief acknowledges the LSL precedent and — while maintaining its disagreement — argues that AUO’s conduct satisfies that standard. Because AUO’s product, an LCD panel, makes up a large portion of the finished product sold to the consumer (and its price), the district court in a related civil case held the effect was indeed an immediate consequence of AUO’s conduct, not that of the intermediary manufacturers, a view which DOJ endorses. Of course, DOJ does not concede that such a connection is necessary in all cases, only that it would be sufficient to affirm the conviction in this case. While DOJ’s AU Optronics brief does not expressly advocate that the Ninth Circuit needs to overturn its precedent, because it believes it can prevail despite the existing interpretation, the Department has stepped into the debate in a pending Second Circuit case. In Lotes Co. Ltd. v. Hon Hai Precision Industry Co. Ltd., the DOJ has joined the Federal Trade Commission to submit a joint amicus brief to influence that court’s position on the circuit split. In Lotes, the plaintiffs allege that the defendants used a patent infringement suit to monopolize the market for USB connectors in China. Computer motherboard manufacturers purchase the USB connectors, incorporate them into motherboards, and sell the motherboards to computer manufacturers. In this case, the USB connectors, motherboards and computers are all made in China, with finished computers being sold in the U.S. The district court distinguished the market for USB connectors in China from the market for personal computers in the U.S., holding that the effects from the alleged monopolization on the U.S. market “are simply too attenuated to establish the proximate causation required by the FTAIA.” But the court also expressly defined “direct” using the language of the LSL test. The government amici suggest that, in adopting that definition while also referring to proximate causation, the district court failed to recognize the distinction between the LSL and Minn-Chem standards, and they urge the Second Circuit to adopt the latter. The brief argues that the LSL
formulation insufficiently protects U.S. consumers from anti-competitive conduct that affects a product assembled overseas. Instead, the brief urges a rule based on Minn-Chem: “anticompetitive conduct that increases the price of a component part has a direct effect when it proximately causes a price increase on a product sold in U.S. import or domestic commerce.” By way of illustrating its test, the brief indicates that the proximate cause analysis would permit charges against foreign manufacturers who sell price-fixed components to other foreign manufacturers for eventual sales in the U.S., or against members of a cartel that caused a worldwide shortage of a product, provided that either of those actions proximately caused an increase in prices to U.S. customers. Under that rationale, the price increase provides the connection to U.S. interests to justify bringing the conduct within U.S. law. Ultimately, the brief suggests that the court should affirm the defendants’ judgment on the alternative ground that the plaintiffs’ injury did not result from the U.S. effects, as in Empagran. But it spends a great deal of time — in fact, most of its argument section — discussing the appropriate characterization of “direct effects,” indicating the government’s concern about the issue and the importance of convincing the Second Circuit that, if it addresses the issue, it should adopt the government’s position. What To Expect The Ninth Circuit heard oral arguments in AUO in October. The Second Circuit will hear Lotes in January. The Ninth Circuit has granted bail to the individual defendants in AUO, but it may be some time before a merits opinion issues in either case. Even so, the positions already taken by the government offer some lessons to the criminal defense bar in handling international cartel cases with effects that may, or may not, directly impact U.S. consumers. As indicated from even a cursory glance at the Lotes amicus brief, the DOJ has made it a priority to advocate for its broader proximate cause definition where possible. This should not be surprising: The stricter LSL test sweeps in less conduct and places more roadblocks in the path of a conviction, guilty plea, or plaintiff’s recovery. Importantly for the DOJ, the definition could have serious implications in many of its cartel investigations. For instance, the ongoing DOJ investigation into the auto parts industry, “the largest criminal investigation the Antitrust Division has ever pursued,” involves component parts of finished cars. Many of the parts manufacturers and their auto manufacturer customers are located in foreign countries like Japan. As a result, the scope of “direct effect” could have tremendous influence on the outcomes of these cases, particularly for individual defendants whose conduct had little to do with the U.S. market or U.S. customers. The expansive reading favored by the DOJ indicates prosecutors intend to continue reaching up the supply chain to enforce the Sherman Act against foreign component manufacturers and their executives for alleged conspiracies that can be connected in some way to U.S. price increases. Under the alternative “immediate consequence” reading, though, the DOJ could find its authority somewhat curtailed. A complicated manufacturing process, a large number of component parts, or intermediate steps that increase the difficulty of disaggregating price effects will make prosecutions and convictions more challenging, as the U.S. effect would no longer be immediately traceable to the foreign conduct. Regardless of how the Second Circuit resolves the issue, the DOJ has not asked the Ninth Circuit to overturn LSL, so the “immediate consequence” test remains viable there and arguable in other circuits.
And the distinction may not always make a difference: In AUO, for instance, the DOJ maintains that LCD screens are such a large part of the finished product that any price increase would have immediately passed through to U.S. consumers. In more complex products, meanwhile, small components may be so insignificant that they would never have even a proximate effect on the finished product’s price. But for cases between those poles, the DOJ has staked out its position, and it will likely continue to pursue future cases based on it unless the Supreme Court rules otherwise. —By Alex Bourelly and Noah Mink, Baker Botts LLP Alex Bourelly is a partner and Noah Mink is an associate in Baker Botts' Washington, D.C., office. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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