The Seventh Circuit heard oral arguments in Motorola Mobility v. AU Optronics, on Wednesday, November 12, 2014. The panel was U.S. Circuit Judges Richard A. Posner, Ilana Diamond Rovner and Michael S. Kanne. There is such a strong interest in this case, and the Foreign Trade Antitrust Improvements Act (“FTAIA”) generally, that I thought I’d share the link to the publicly available audio recording before adding a few quick thoughts of my own. The argument can be heard here.
Before you Listen
I have read many FTAIA cases and articles (and written a few) and I’m not ashamed to admit that I always go back and re-read this confusing statute before re-engaging with the FTAIA. In 1982 Congress sought to limit and define the extraterritorial application of the Sherman Act. The FTAIA says:
“Sections 1 to 7 of this title [the Sherman Act] shall not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations unless —
“(1) such conduct has a direct, substantial, and reasonably foreseeable effect —
“(A) on trade or commerce which is not trade or commerce with foreign nations [i. e., domestic trade or commerce], or on import trade or import commerce with foreign nations; or
“(B) on export trade or export commerce with foreign nations, of a person engaged in such trade or commerce in the United States [i. e., on an American export competitor]; and
“(2) such effect gives rise to a claim under the provisions of sections 1 to 7 of this title, other than this section.
“If sections 1 to 7 of this title apply to such conduct only because of the operation of paragraph (1)(B), then sections 1 to 7 of this title shall apply to such conduct only for injury to export business in the United States.” 15 U. S. C. § 6a.
The Supreme Court has explained: “This technical language initially lays down a general rule placing all (nonimport) activity involving foreign commerce outside the Sherman Act’s reach. It then brings such conduct back within the Sherman Act’s reach provided that the conduct both (1) sufficiently affects American commerce, i. e., it has a “direct, substantial, and reasonably foreseeable effect” on American domestic, import, or (certain) export commerce, and (2) has an effect of a kind that antitrust law considers harmful, i. e., the “effect” must “giv[e] rise to a [Sherman Act] claim.” §§ 6a(1), (2). F. Hoffmann-La Roche Ltd v. Empagran SA, 542 US 155 (2004).
Empagran involved the worldwide vitamin cartel. The cartel injured (i.e. overcharged) consumers in many countries. The vitamin cartel led to higher vitamin prices in the United States and independently also to higher vitamin prices in other countries. The Court concluded that, in this scenario, a purchaser in the United States could bring a Sherman Act claim under the FTAIA based on domestic injury, but a purchaser in Ecuador could not bring a Sherman Act claim based on foreign harm.
But, on to ….
The Argument (Recap):
Counsel for Motorola, Thomas Goldstein, was up first. He began with: “The direct effect is the increased price the parent paid for importing the phones.” The first question by Judge Rovner was “What is the limiting principle? (to component price-fixing cases.) Goldstein responded that a key fact in this case, and the limiting principle, was that while the purchases were made by Motorola’s foreign subsidiaries, Motorola dealt directly with the cartelists in design, pricing, etc. The fact that the parent in fact negotiated the prices, and dealt directly with the cartel members satisfied the “reasonably proximate” test that the plaintiffs advocated (and the Seventh and Second Circuit has adopted) to meet the “direct, substantial, and reasonably foreseeable” prong of the FTAIA.
The panel’s questions to Motorola’s counsel repeatedly focused on the fact that the purchases at issue were purchases by Motorola’s foreign subsidiaries from foreign companies in transactions that occurred oversea. The Court wanted to know why Motorola’s subsidiary should not have to seek redress in the courts of the country where they chose to incorporate. The Court was concerned that Motorola was trying to forum shop by having the parent seek damages in U.S. court for purchases made by the foreign subsidiary.
Some of the pointed questions were:
- “You are trying to have it both ways. You’re getting tax benefits from treating these subsidiaries as foreign companies, but you want an antitrust benefit from treating them as you.”
- “Aren’t you attempting to set up foreign subsidiary to claim the benefits of laws that suit you, but then say the status of the subsidiary is irrelevant when you want to take advantage of U.S. antitrust laws?”
- “Why do you say Motorola purchased 5 million LCD panels from the cartel members? Motorola’s subsidiary purchased the LCD panels.”
- “You are trying to have it both ways. You like the tax benefits of foreign jurisdictions but for antitrust purposes you want to treat the subsidiaries purchases as the parents?”
The United States As Amicus
The government sought amicus status because it was concerned (terrified) with the prior, now vacated Motorola Mobility ruling, that held that component price-fixing did not meet the “direct effects” test of the FTAIA. James Fredericks for the Antitrust Division said : “We are not on either side. Our view is that is a direct effect. Price fixing on components can have a direct effect on U.S. commerce.” The court asked the government what it would use as a limiting principle? Frederick pointed to the proximate causation test adopted by the Seventh Circuit in Minn-Chem. He noted this test was also adopted by the Second Circuit in Lotes where the court also “provided some vocabulary for how to measure” proximate causation. The government said the problem for Motorola in this case was the second prong of the FTAIA—the “gives rise to” requirement.”
Fredericks noted that foreign countries, which had filed amicus briefs, are concerned about the Motorola Mobility case, but not the U.S. enforcement actions.
Robert Wick of Covington & Burling, counsel for the defendants started by emphasizing that the alleged price fixed components in this case were made overseas, purchased overseas, assembled overseas, paid for with funds maintained overseas, under purchase orders that incorporated foreign law. It was the cartel’s anticompetitive effects on foreign commerce that “gave rise” to the antitrust injuries, so it was Motorola’s subsidiaries that were injured, not the U.S. parent.
The defendant argued that Motorola had waived the theory of harm it was advocating before the Seventh Circuit. (that the purchase of the cell phones by Motorola parent from its subsidiary was at an inflated price.) Rather than recount that fact-based waiver argument here, it is simply worth noting that it could provide an “out” to the Court if it wants to dismiss the suit without wading into FTAIA interpretation. Even if not waived, however, Wick seized on the concern of the panel that the purchases were made overseas by Motorola’s subsidiary: “We don’t use U.S. antitrust law to police harm that flows from effects on foreign commerce” he said.
Some of my Thoughts
The court focused on the fact that Motorola set up a foreign subsidiary and it was the foreign subsidiary that made the purchases of the price fixed product. It didn’t seem right to the Court that Motorola could take advantage of operating through a foreign subsidiary for some laws but seek to take advantage of the U.S. treble damage regime for an antitrust suit. I have written about this issue and one article was published in Competition Policy International (CPI) on Sept 17, 2014 (here). I wrote:
“A compromise decision in Motorola Mobility would be to find the requirements of the FTAIA met, thus preserving the DOJ’s ability to bring appropriate component price-fixing cases, while applying the principles of Illinois Brick to dismiss the plaintiff’s suit. The purchases that are at issue are purchases made overseas by Motorola’s foreign subsidiaries. These price-fixed panels were then assembled into a finished product and imported for sale into the U.S. Under Illinois Brick, therefore, the plaintiff in Motorola Mobility was not a direct purchaser and does not have standing to bring the suit. There is some equity in this position. Motorola Mobility chose to set up and purchase the LCD panels through foreign subsidiaries to take advantage of tax, labor and other laws it must have considered favorable in doing business in those countries. It is not unreasonable to find that “You take the good with the bad” and any damage actions should be brought in the country where the businesses were set up. U.S consumers, by contrast, have little to no choice but to buy products that have some foreign-made components in them.”
If you are interested and cannot access the article through CPI (a subscription service), it is also available here:
The Seventh Circuit panel spent considerable time focusing on Motorola’s setting up a foreign subsidiary to take advantage of foreign taxation rules. There were numerous questions concerning who pays what taxes, are profits repatriated, etc. I imagine the real benefits to overseas manufacturing flow from labor laws, or lack of them—no minimum wage, no overtime, no workers’ comp; in other words cheap labor. The point remains: having set up a foreign subsidiary for whatever reason, Motorola may be stuck with whatever remedies the foreign subsidiary has. Or maybe not. We will have to see what opinion the Court issues.
My sense is that the Seventh Circuit will repeat its earlier ruling that the Motorola’s claims based on its foreign subsidiaries’ purchases were properly dismissed for failure to meet the substantive requirements of the FTAIA. But, I think the court will revise its previous ruling in this way. The Court may not reach the question of whether plaintiffs sufficiently alleged that the cartel’s anticompetitive conduct had a “direct, substantial and reasonably foreseeable effect” on domestic commerce. This would make the U.S. government happy and satisfy its strong objection to the court’s initial ruling that component price-fixing did not satisfy the “direct” requirement of the FTAIA. But, I sense that the court will bounce Motorola’s suit on the grounds that the “antitrust injury” was suffered by Motorola’s foreign subsidiary, and thus, Motorola’s parent does not have standing.
Thanks for reading.