In an increasingly global economy, it is becoming more and more common for a product to be sold outside of the U.S., yet find its way back into the states, either as a resale product or as part of a finished downstream product. The question then becomes, does U.S. antitrust law apply to that foreign sale? The answer largely depends on the scope of the Foreign Trade Antitrust Improvements Act (FTAIA), the law that governs such conduct. Not surprisingly, the U.S. Department of Justice (DOJ) and plaintiffs’ bar have been pushing for an expansive reading of the law, so more such sales would be governed by American antitrust law. The 2nd U.S. Circuit Court of Appeals just gave them a boost in a case recently decided — Lotes Co., Ltd. v. Hon Hai Precision Industry, Co., Ltd. A quick background on FTAIA and the Lotes case will help you understand why all of this matters to you.
The FTAIA governs the extraterritorial reach of U.S. antitrust laws. Its original, ostensible purpose was to limit the extraterritorial reach, so the U.S. did not play the role of a global antitrust cop. According to the FTAIA, any non-domestic commerce that is not a direct import to the U.S. is outside the scope of U.S. antitrust laws — unless the foreign sale:
(a) has a “direct, substantial, and reasonably foreseeable effect” on the U.S. domestic market or the U.S. export market and
(b) “gives rise to” an antitrust claim by the plaintiff.
The problem, though, is the definition of the terms “direct” and “substantial” and they are at the heart of an interpretative debate among the federal courts of appeals.
On the one hand is the 9th Circuit, which in U.S. v. LSL Biotechnologies interpreted “direct, substantial, and reasonably foreseeable effect” to mean that the domestic antitrust injury has to be an “immediate consequence” of the foreign anticompetitive conduct. This “immediate consequence” standard is much more restrictive on the extraterritorial reach of U.S. antitrust laws.
On the other hand, the 7th Circuit in Minn-Chem, Inc. v. Agrium, Inc. — decided just a couple of months ago — interpreted “direct, substantial, and reasonably foreseeable effect” to mean that the domestic antitrust injury only has to have a “reasonably proximate causal nexus” with a company’s foreign anticompetitive conduct. This proximate cause standard is more permissive in reaching foreign anticompetitive conduct than the 9th Circuit’s immediate consequence standard.
Against that backdrop comes the 2nd Circuit’s Lotes Co. decision.
The facts of the Lotes case
In Lotes, the plaintiff was a Taiwanese company that designed and manufactured USB connectors. Lotes manufactured the USB connectors in China and sold them to original design manufacturers (ODMs) in China, which incorporated the USB connectors into well-known computer brands such as Dell, HP and Apple. The ODMs then sold the computer brands around the world, including in the U.S.
The defendants competed with Lotes in the design and manufacturing of USB connectors, but they were also ODMs that assembled the USB connectors into finished computer products for sale around the world. The dispute arose out of the latest USB connector standards — USB 3.0 — which were developed through an industry standard-setting organization, USB Implementers Forum, Inc. (USB-IF). Under the industry arrangement with USB-IF, any company in the industry that provides proprietary technology for purposes of developing the next-generation USB connector standard promises to license that technology to the industry under reasonable terms so all companies in the industry can manufacture USB 3.0-compliant connectors. Lotes claimed that the defendants refused to license their USB 3.0 technology to Lotes, and instead sued Lotes for patent infringement in China for allegedly infringing on USB 3.0 technology — despite their agreements with USB-IF on the USB 3.0 standard. Lotes alleged that the defendants engaged in a concerted effort to put Lotes out of business. Given the central role Chinese manufacturing plays in the global electronics supply chain, Lotes alleged that curbing competition in China (by essentially putting the company out of business) would have downstream effects worldwide, including in the United States.
The trial court disagreed and dismissed Lotes’ case based upon the FTAIA, holding that the defendants’ conduct abroad did not sufficiently affect U.S. domestic commerce. The trial court relied upon the 9th Circuit’s immediate consequence standard and found that, even accepting Lotes’ allegations as true, the company had not alleged an antitrust injury to U.S. domestic commerce that was an “immediate consequence” of the defendants’ alleged anticompetitive activities abroad.
The 2nd Circuit’s decision in Lotes
As noted, the primary issue before the 2nd Circuit was the parties’ dispute over whether the court should apply the 9th Circuit’s immediate consequence standard as the trial court had done, or apply the proximate cause standard favored by the 7th Circuit and thereby keep the case alive.
Interestingly, the 2nd Circuit chose a different, and arguably circuitous, route for its decision. While the court actually declined to affirmatively decide the case on the interpretation of “direct, substantial, and reasonably foreseeable effect,” its decision included a detailed discussion in which it favored the proximate cause standard adopted by the 7th Circuit. It therefore waded into the dispute on this critical issue without affirmatively deciding the case on those grounds.
In terms of deciding the case, however, the 2nd Circuit felt the case was better resolved on the other requirement under the FTAIA; namely, whether the foreign anticompetitive conduct “gives rise to” the plaintiff’s antitrust injury. For that second FTAIA requirement, the 2nd Circuit held that the foreign anticompetitive conduct must have a domestic effect that proximately causes the plaintiff’s antitrust injury. In other words, it found a proximate cause standard was also applicable to FTAIA’s second requirement. If you are confused, don’t be, since there is a relevant distinction here. While the issue of “direct, substantial, and reasonably foreseeable effect” (i.e., the first FTAIA requirement) analyzes whether the defendant’s alleged antitrust violations cause injury to the U.S. domestic market as a whole, this second requirement under the FTAIA analyzes whether the defendant’s alleged antitrust violations cause injury to the plaintiff itself. Thus, for purposes of the FTAIA, a plaintiff must show that the defendant’s conduct both (a) proximately caused an antitrust injury to the U.S. domestic market as a whole and (b) the antitrust injury to the domestic market proximately caused an antitrust injury to the plaintiff itself.
The 2nd Circuit then held that Lotes failed to meet the FTAIA’s second requirement. According to the court, Lotes’ own specific injury (i.e., being excluded from the market because the defendants would not license their USB 3.0 technology) was not caused by the alleged antitrust injury to the U.S. domestic market (i.e., prices rising for USB connectors in the U.S.). Instead, Lotes’ injury would exist regardless of any anticompetitive effect on the U.S. domestic market as Lotes’ injury would precede any injury to the U.S. domestic market. In sum, the 2nd Circuit affirmed the trial court’s decision to dismiss Lotes’ case, though it relied on a different rationale than the trial court.
The bottom line
Lotes is an interesting and noteworthy case. We now have the 2nd Circuit supporting the 7th Circuit’s proximate cause standard for the first FTAIA requirement over the narrower immediate consequence standard from the 9th Circuit. As more circuits weigh in, and to the extent the conflicts among the circuits grow, it seems the likelihood that the U.S. Supreme Court will weigh in and definitively decide the issue will also increase.
At the same time, Lotes is unique in that it involves competitors doing business outside the U.S. and using U.S. antitrust laws to fight one another over a business dispute that was centered solely in China (ultimately, Lotes’s injury, i.e., the defendants’ failure to license their USB 3.0 technology, began and ended in China since that is where the design and manufacture took place). Thus, the nexus between the specific injury and the U.S. was always attenuated. Had the defendants been sued by direct or indirect purchasers, however, there may have been a different result. Under those circumstances, the injury to the market and the injury to the plaintiff would arguably be the same.
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The proper scope of American antitrust law’s extraterritorial reach remains in flux at the moment with a circuit split on the proper standard. Additionally, federal courts are grappling with the proper application of the standard to various fact patterns prevalent in this age of globalized commerce, particularly in supply chains. Companies should consult with trusted advisors to understand the nuances of the law and how their conduct may be affected.