The Seventh Circuit has decided to rehear the appeal from a judgment dismissing nearly Motorola’s entire $3.5 billion antitrust claim against foreign manufacturers of LCD panels. The Court has not yet set a schedule for the filing of supplemental briefs.
In Motorola Mobility v. AU Optronics Corp, No. 14-8003, 2014 WL 1243797 (7th Cir. Mar. 27, 2014)(vacated), the Seventh Circuit (J. Posner) upheld a lower court ruling dismissing most of Motorola’s damage claims from price fixing of LCD panels. The commerce at issue was LCD panels sold by defendants to Motorola’s foreign subsidiaries and incorporated into products such as cell phones. The finished product was imported into the U.S. The Court found that a damage claim based on the purchases by Motorola’s foreign subsidiaries was barred by the FTAIA. The Court held that because the price-fixed panels were sold to customers overseas, the effect on U.S. commerce was indirect, even though the price of the finished product later imported into the U.S. may have been inflated by the component price fixing.
The Motorola Mobility Court rejected the view that the component price fixing had a “direct, substantial and reasonably foreseeable effect” on U.S. commerce. The Court noted “nothing is more common nowadays than for products imported into the United States to include components that the producers had bought from foreign manufacturers.” From this the Court concluded: “The position for which Motorola [and the U.S.] contends would if adopted enormously increase the global reach of the Sherman Act, creating friction with many foreign countries and ‘resent[ment at] the apparent effort of the United States to act as the world’s competition police officer,’ a primary concern motivating the foreign trade act.” The DOJ joined in the request for en banc review. Motorola Mobility involves the same LCD panel cartel that the Antitrust Division successfully prosecuted, sending many foreign defendants to prison.
Component Cartels LCD Panels (Motorola Mobility) and Potash (Minn-Chem)
The Seventh Circuit previously considered the FTAIA in Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845 (7th Cir. 2012)(en banc). In Minn-Chem the Court found that the foreign anticompetitive conduct met the FTAIA requirements (i.e. the conduct had a direct, substantial and reasonably foreseeable effect on U.S. commerce). The defendants were members of an alleged global potash cartel that fixed the price of potash sold in foreign markets such as China and Brazil. While the anticompetitive conduct involved fixing the prices of potash sold to overseas customers, the fixed prices were used as a benchmark for U.S. prices. In Minn-Chem “foreign sellers allegedly created a cartel, took steps outside the United States to drive up the price of a product that is wanted in the United States, and then (after succeeding in doing so) sold that product to U.S. customers.” (emphasis in original). The Minn-Chem Court found that, “It is no stretch to say that the foreign supply restriction, and the concomitant price increase forced upon the Chinese purchasers, were a direct—that is, proximate—cause of the subsequent price increase in the U.S.” So, while the conduct in Minn-Chem took place overseas, it directly and substantially affected the price of potash bought by customers in the United States. In Motorola Mobility, the anticompetitive conduct fixed the price of a component purchased by customers overseas. The effect felt by US consumers in purchasing a product, which contained a component that had been price-fixed, was indirect. The Motorola Mobility Court said the LCD panel component price fixing was closer to “the situation in which action in a foreign country filters through many layers and finally causes a few ripples in the United States.” (quoting Minn-Chem).
Is there A Good Test to Determine Whether Component Price Fixing Creates “Direct, Substantial and Reasonably Foreseeable” Injury to U.S. Commerce?
The virtue of Judge Posner’s narrow reading of Minn-Chem is that it is a much easier test to apply. The price-fixed product sold in China was potash. The product bought by U.S. customers was potash. Was it reasonably foreseeable that fixing the price of potash in China would have a direct and substantial effect on prices of potash in the U.S.? Since the fixed price was a benchmark, that was not hard to see. Component price fixing is a much harder line to draw. Take a not far-fetched example of price fixing on components of a car that is imported into the U.S. Suppose the price of the engine accounts for 20% of the cost of the finished automobile. If engine prices were fixed would that constitute “direct, substantial and reasonably foreseeable” antitrust injury? What if the fixed component cost was 10%, 5%, etc. of the price of the finished product? Or, what if the chemical used to make the tires bought by the car manufacturer was price-fixed? What if the companies that transported the cars from the auto factory to the port for export had rigged bids for this contract? In each case the foreign collusion will raise the price of the final product bought by a U.S. customer by some [increasingly small] amount. But, in which instance(s) are the FTAIA requirements met?
The Second Circuit addressed this question in Lotes Co. v. Hon Hai Precision Industries2014 WL 2487188 (2d Cir. June 4, 2014). That Court explained, “antitrust law has long recognized that anticompetitive injuries can be transmitted through multi-layered supply chains. There is nothing inherent in the nature of outsourcing or international supply chains that necessarily prevents the transmission of anticompetitive harms or renders any and all domestic effects impermissibly remote and indirect.” An objection to this test, and perhaps the reason Judge Posner was concerned about the US becoming the world’s competition police, is that it does not benefit from a bright line. When can U.S. consumers sue for damages for component price fixing? It may take extensive discovery to answer the question of whether the anticompetitive conduct causes “direct, substantial and reasonably foreseeable” antitrust injury in the United States. Motorola’s suit against the defendants is now in its fifth year.
The Conflicting Views of DOJ and Certain Foreign Governments
One interesting feature of this case is that several countries with which the Antitrust Division coordinates closely in fighting cartels had opposed a rehearing and had filed briefs in opposition to the position of the DOJ. These included: the Japanese Ministry of Economy, Trade and Industry (METI), the Ministry of Economic Affairs for the Republic of China, Taiwan (MEA), and the Korea Fair Trade Commission (KFTC). All express opposition to unreasonably expansive extraterritorial application of U.S. antitrust law to component price fixing. Before agreeing to rehear the case, the Seventh Circuit had requested that the U.S. share its views “concerning the potential impact on U.S. foreign commercial relations, and on U.S. foreign relations more generally, of deciding the present appeal one way or another” and regarding “the concerns expressed by foreign governments” in amicus curiae briefs. On June 27, 2014 the DOJ filed its supplemental brief. http://www.justice.gov/atr/cases/f306700/306783.pdf.
The DOJ has a compelling position that in certain cases U.S. consumers should be protected from, and have remedies against, component cartels. The LCD case is good example. Some LCD panels were shipped to the U.S. for assembly here. The FTAIA specifically carves out that commerce from the reach of the statute. Motorola’s (minimal) damage action based on that commerce is not in question. Other panels were sold to Motorola’s subsidiaries overseas, assembled into finished products, and imported into the U.S. The effect on U.S. customers is the same regardless of the distribution channels chosen by Motorola. At the same time, without a bright line, foreign governments have a non-frivolous concern that the U.S. [and plaintiff’s class action lawyers] will be the world’s competition police and unduly infringe upon the sovereignty of other countries. Korea, for example, contends that applying the Sherman Act here would extend its application “to any intermediary product produced or purchased outside the United States, so long as it is eventually incorporated into an end product sold in the United States.” The DOJ replied: “But there is no reason to believe that would be the consequence of finding a direct effect on U.S. commerce in the particular circumstances here or in many other cases.” Of course, the uncertainty of this case-by-case analysis may be the very concern of the foreign countries that filed amicus briefs.
A Common Concern About Extraterritorial Cartels, But Different Approaches to Remedies
In its Motorola Mobility supplemental brief, the DOJ noted that the very countries that object to the DOJ reading of the FTAIA all provide under their own laws that consumers may obtain redress for extraterritorial cartel conduct stating, “It is not surprising then that the extraterritorial application of antitrust laws on the basis of effects on a country’s own commerce is now accepted by many jurisdictions around the world.” But, that alone does not defeat the objections of the foreign governments. In F. Hoffman-LaRoche v. Empagram, 542 U.S. 155, 161 (2004)the Supreme Court noted: “Regardless, even where nations agree about primary conduct, say price fixing, they disagree dramatically about appropriate remedies. The application, for example, of American private treble damages remedies to anticompetitive conduct taking place abroad has generated considerable controversy.” In its brief DOJ gave examples of Japan, and Korea applying competition laws extraterritorially. Some of these examples involved the direct imports–i.e. graphite electrodes and marine hose. In one example given by DOJ that did involve component price fixing– cathode ray tubes—Japan’s only remedy was to issue cease and desist orders against the cartelists. It is obvious that a cease and desist order against a cartel already prosecuted by the U.S. is a far less significant remedy than treble damage class action lawsuits.
There is much more to come on the important issue of the scope and application of the FTAIA. I’ll keep you posted. Thanks for reading.