Seventh Circuit Sheds Light on Foreign Reach of Federal Antitrust Laws

Dugan_Brady-WEB135AlfanoFeatured Expert Contributor – Antitrust & Competition, U.S. Department of Justice

Sitting in for Featured Expert Contributor Mark J. Botti on this post are Squire Patton Boggs partner J. Brady Dugan and associate Peter C. Alfano, both in the firm’s DC office.

Whether U.S. antitrust laws reach wholly foreign conduct is a question that has been addressed by all levels of the federal court system over the past decade, including by the U.S. Supreme Court.1 Nevertheless, it is a question as to which many companies, in the U.S. and abroad, may feel there is not a clear answer. Consider, for example, a corporation that purchases a product in the U.S. that was finished or assembled overseas. If the finished product includes a component that the assembler purchased at a price that had been inflated by an overseas price-fixing conspiracy among the component manufactures, can the U.S. purchaser of the finished product sue the component seller in U.S. court for treble damages? Can the overseas assembler recover damages from the overseas component manufacturer in the U.S.? Or to put it another way, can a foreign corporation that manufactured and sold a product overseas, to an overseas assembler, be sued for price-fixing in the U.S. by a U.S. customer of the foreign assembler? It will come as no surprise that the answers to these questions are very fact-specific. But recently, a panel of the U.S. Court of Appeals for the Seventh Circuit issued a decision that helps clarify the law.

In Motorola Mobility LLC v. AU Optronics Corp. (Motorola II), decided on November 26, 2014, the Seventh Circuit set a bright line for bringing private antitrust litigation involving foreign conduct.2 The Motorola II court held that where overseas anticompetitive conduct affected the price of a product sold to an overseas corporation that assembles components into a finished product, a U.S. purchaser of the finished product does not have the right to sue the component manufacturer in the U.S. under the Sherman Antitrust Act. This rule holds even where, as in Motorola II, the purchaser of the finished product is the U.S. parent corporation of the overseas assembler; there is still no cause of action under the U.S. antitrust laws.

Motorola II began as a civil action following a U.S. Department of Justice criminal prosecution of cartel conduct by liquid crystal display (LCD) panel manufacturers in China and Taiwan. The foreign-manufactured LCD panels were sold by the alleged conspirators to consumer electronics companies outside the United States, which then incorporated the LCD panels into final products, such as mobile phones, and shipped them into the United States. Motorola, a U.S. company, sought damages against AU Optronics and other LCD manufacturers for the cartelized LCD panels that Motorola’s foreign subsidiaries in China and Singapore purchased and used in assembling mobile phones ultimately sold to the Motorola parent company in the United States. Motorola argued it had a claim against the foreign LCD manufacturers, even though Motorola’s foreign subsidiaries purchased the LCD panels abroad, because it was the Motorola parent company that negotiated specifications and costs with the LCD manufactures, and controlled the “price and quantity” decisions of its foreign subsidiaries.

The Seventh Circuit found that Motorola’s claims did not meet the Sherman Act’s requirements for bringing an action based on foreign trade or commerce. That part of the Sherman Act, known as the Foreign Trade Antitrust Improvements Act (FTAIA), prohibits the application of the antitrust laws to conduct wholly outside the U.S. regarding products sold outside the U.S., except in very limited circumstances.3 The FTAIA permits a U.S. antitrust action only where the foreign conduct: (a) has a “direct, substantial, and reasonably foreseeable effect” on U.S. commerce; and (b) “gives rise to a claim” under the Sherman Act.

In applying the FTAIA, the Motorola II court first noted, in dicta, that the overseas sale of a price-fixed component to an overseas assembler could have the requisite “direct, substantial and reasonably foreseeable effect” on U.S. commerce to support a Sherman Act violation. This finding reverses the holding in Motorola I that such conduct does not have a sufficiently direct effect on U.S. commerce to come within the FTAIA.4 The finding of a direct effect on U.S. commerce was particularly important to the DOJ, which argued in an amicus brief that a finding of no direct effect under these facts could significantly impact its criminal cartel enforcement program.5

Although the overseas sale of a price-fixed component to an overseas assembler could have a direct effect on U.S. commerce, the Motorola II court found that it could not give rise to a Sherman Act claim, failing the second prong of the FTAIA test. The court reasoned that “Motorola can’t just ignore its corporate structure whenever it’s in its interests to do so. Motorola’s foreign subsidiaries, the direct purchasers from the makers of the panels, are legally distinct foreign entities and Motorola cannot impute to itself the harm suffered by them.” Judge Posner noted that at most Motorola was a “derivative victim” as the owner of the harmed foreign subsidiaries, and that derivative victims lack antitrust standing under the law.

The Motorola II court has provided at least some clarity to the question of when the Sherman Act applies to foreign conduct. A U.S. corporation does not have a Sherman Act cause of action in federal court when its foreign subsidiary buys a component at a price inflated by an overseas price fixing conspiracy. This is true even when the foreign subsidiary sells the product containing the price-fixed component to its U.S. parent. This result follows well-established federal law which says that only direct victims of a price fixing conspiracy may bring a private damages action in federal court.6 At the same time, the ruling leaves in place the ability of the U.S. government to bring a federal criminal action in U.S. court, on the same facts, against the companies that conspired to fix the price of the component.

NOTES

  1. See F. Hoffman-LaRoche, Ltd. v. Empagran S.A., 542 U.S. 155, 162 (2004).
  2. Motorola Mobility LLC v. AU Optronics Corp., 2014 U.S. App. LEXIS 22408, 13 (7th Cir. Ill. Nov. 26, 2014), amended by Motorola Mobility LLC v. AU Optronics Corp.. No. 14-8003, Dkt. 148 (7th Cir. Ill., Jan. 12, 2015). Motorola II is a rehearing of the appellate decision (Motorola I) by the same panel in March 2014. Motorola Mobility LLC v. AU Optronics Corp., 746 F.3d 842 (7th Cir. 2014) vacated, reh’g granted, 2014 U.S. App. LEXIS 12704 (7th Cir. Ill., July 1, 2014).
  3. See 15 U.S.C. § 6a.
  4. 746 F.3d at 844.
  5. Brief For The United States and The Federal Trade Commission as Amici Curiae in Support of Panel Rehearing or Rehearing En Banc, No. 14-8003, Dkt. 30, p. 7 (Apr. 29, 2014).
  6. Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).

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