[co-author: Erica Hall Dressler - Law Clerk]

The Foreign Trade Antitrust Improvements Act (FTAIA), 15 U.S.C. § 6a, was enacted to provide greater clarity on the Sherman Antitrust Act’s reach. However, the FTAIA continues to muddy the waters. In a recent decision from the U.S. Court of Appeals for the Seventh Circuit — Motorola Mobility LLC v. AU Optronics Corp., No. 14-8003, 2014 U.S. App. LEXIS 22408 (7th Cir. Nov. 26, 2014) — the court ruled that the FTAIA blocked 99% of Motorola Mobility’s claims resulting from an alleged price fixing conspiracy among foreign liquid-crystal display (LCD) panel manufacturers. The U.S. Department of Justice prevailed in a landmark trial related to this same conspiracy in the Ninth Circuit, winning a $500 million fine against a foreign company and obtaining three-year sentences for its former president and vice president.

Background

Illinois-based Motorola sells electronic devices, including cell phones, which it largely manufacturers through its 10 foreign subsidiaries. As part of the manufacturing process, those subsidiaries purchase LCD panels from foreign companies. Motorola brought an opt-out suit against many of the foreign LCD panel manufacturers in 2007, accusing them of participating in a global price-fixing conspiracy from 1996 through 2006.

Motorola’s purchases of LCD panels fall into the following three categories:

1. LCD panels purchased by Motorola and delivered to facilities in the United States
2. LCD panels purchased by Motorola’s foreign subsidiaries, delivered to the subsidiaries’ manufacturing facilities abroad and used in phones later sold in the United States
3. LCD panels purchased by Motorola’s foreign subsidiaries, delivered to the subsidiaries’ manufacturing facilities abroad and used in phones later sold outside the United States

The first category accounted for only one percent of the panels sold by the defendant manufacturers. The other 99 percent fell into the second and third categories, meaning that almost every panel was bought, paid for and delivered to one of Motorola’s foreign subsidiaries.

While filed in the Northern District of Illinois, the case was transferred to the Northern District of California for coordinated pretrial proceedings as part of pending multidistrict litigation (the MDL court). In the MDL court, the defendants filed a motion for partial summary judgment on Motorola’s claim relating to the extraterritorial reach of the Sherman Act, specifically whether Motorola could seek damages for purchases made by its foreign affiliates. The MDL court denied the motion after finding that there was evidence that could lead a jury to determine that Motorola made decisions regarding the pricing of the panels in the United States. For example, Motorola claimed that it approved the prices at which its foreign subsidiaries purchased LCD panels. The MDL court then remanded the case to the Northern District of Illinois for trial.

Upon remand, the defendants moved for reconsideration of the MDL court’s ruling allowing Motorola to continue its claims for its extraterritorial purchases. Motorola Mobility, Inc. v. AU Optronics Corp., No. 09 C 6610, 2014 U.S. Dist. LEXIS 8492, at *7 (N.D. Ill. Jan. 23, 2014). The Illinois district court disagreed with the MDL court’s decision, granted the defendants’ motion for reconsideration and barred the vast majority of Motorola’s antitrust claims. On March 13, 2014, the Seventh Circuit Court of Appeals affirmed a key part of the district court’s ruling — that Motorola was not entitled to bring a claim under the Sherman Act based on the purchases made abroad by its foreign subsidiaries. Motorola Mobility, Inc. v. AU Optronics Corp., 746 F.3d 842, 843 (7th Cir. 2014). On July 1, 2014, however, a panel of the Seventh Circuit Court of Appeals vacated that judgment in response to Motorola’s argument that a recently announced Second Circuit decision supported its claim.

Seventh Circuit Decision

On November 26, Judge Posner delivered the Seventh Circuit Court’s ruling. Critical to the court’s analysis was its interpretation and application of the FTAIA, which limits the application of U.S. antitrust laws to actions taking place abroad. Sections 6a(1)(A) and (2) provide that the Sherman Act

shall not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations unless . . . such conduct has a direct, substantial, and reasonably foreseeable effect . . . on trade or commerce which is not trade or commerce with foreign nations . . . [and the] effect [on commerce] gives rise to a claim under [U.S. antitrust law.]

F. Hoffman-La Roche Ltd. v. Empagram S.A., 542 U.S. 155, 161–62 (2004) (internal quotations omitted).

As the Seventh Circuit explained, in order for a claim to proceed, it must have a “direct, substantial and reasonably foreseeable effect” on the domestic economy and that effect “must give rise to a federal antitrust claim.” Motorola Mobility, Inc., 2014 U.S. Dist. LEXIS 8492, at *7.

As an initial step, the court held that Motorola could not base a U.S. antitrust claim on LCD panels purchased by foreign subsidiaries and used in phones sold abroad, 57 percent of the LCD panels at issue, because “they neither affected domestic U.S. commerce nor gave rise to a cause of action under the Sherman Act.” Id. at *8.

Next, the court rejected Motorola’s argument that that the remaining 42 percent of the company’s purchases were covered under the U.S. antitrust laws as “import commerce.” Specifically, the court concluded that the importer of the goods incorporating those LCD panels was Motorola, not the defendants. As a result, the purchases did not qualify for the FTAIA’s import trade exception.

Motorola then needed to show that the defendants’ price fixing of the panels abroad, when the panels became components of cell phones manufactured abroad and sold in the United States, had “a direct, substantial, and reasonably foreseeable effect” on U.S. commerce. Accordingly, the court addressed the issue of whether the effect of the alleged anticompetitive conduct gave rise to a U.S. antitrust claim. The court held that multinational companies, with subsidiaries incorporated in countries all over the world, could not be treated “as one” for purposes of Sherman Act analysis and that Motorola’s subsidiaries are governed by the laws of the countries in which they are incorporated and operate. The court stated, “‘[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.’” Id. at  *7 (quoting Disenos Artisticos E Industriales, S.A. v. Costco Wholesale Corp., 97 F.3d 377, 380 (9th Cir. 1996)). Thus, Motorola could not claim as its own the harm suffered by its foreign subsidiaries as a result of paying allegedly inflated prices.

The court reasoned that, because the foreign subsidiaries had submitted to foreign laws, those subsidiaries had to seek relief for unlawful trade under the laws of the countries in which those subsidiaries were incorporated or where the defendants were incorporated. However, the opinion makes it clear that its holding does not block antitrust actions in U.S. courts for international conspiracies that affect U.S. commerce. Judge Posner asserts that the ruling does not permit “‘foreign cartelists to come to the United States’ and ‘unfairly overcharge U.S. manufacturers,’” because that is not what happened here; the defendants did not sell their products in the United States. Id. at *23.

The Seventh Circuit interpreted the FTAIA so as to minimize the “‘risk of interference with a foreign nation’s ability to independently regulate its own commercial affairs.’” Id. at *15 (quoting F. Hoffman-La Roche Ltd., 542 U.S. at 165). Motorola’s subsidiaries were injured in foreign commerce, and the court held that it “would be an unjustified interference with the right of foreign nations to regulate their own economies” for Motorola to be able to stand in the shoes of its foreign subsidiaries. Id. at *24.

Finally, the court addressed Motorola’s argument that it suffered as an indirect purchaser of LCD panels by purchasing cell phones from its own subsidiaries at inflated prices caused by the inflated LCD prices. The court rejected this argument because it determined that, to be subject to the Sherman Act under the FTAIA, the effect of anticompetitive conduct on U.S. commerce must give rise to an antitrust cause of action. In this situation, no Sherman Act cause of action arose because the transaction occurred abroad.

In summary, the Seventh Circuit made it clear that U.S. plaintiffs do not have the right to bring actions under the U.S. antitrust laws by virtue of the harm caused to their foreign affiliates. According to the court, a U.S. corporation may not bring a Sherman Act case based on a cartel operating abroad by foreign companies when the claimed harm is suffered not by the U.S. company, but by its foreign subsidiaries.

As the world economy becomes more interconnected and as U.S. companies rely more on their foreign subsidiaries and suppliers as critical links in the global supply chain, it may be necessary for firms to supplement or develop contractual language aimed at enhancing their opportunities to select a favorable forum and applicable law. Companies may also need, to reconsider the way in which they deploy their legal resources, be less reliant on the U.S. laws, and become more familiar with foreign antitrust laws.