A team of attorneys from Reed Smith LLP presented the May Monthly Update for In-House Counsel on Antitrust Developments. The following is a short article summarizing one of the recent developments discussed during their program.

On March 27, 2014, the Seventh Circuit handed down a decision authored by Judge Posner that could significantly limit U.S. antitrust law’s reach to defendants conducting business abroad. In Motorola Mobility LLC v. AU Optronics Corp., No. 14-8003, 2014 WL 1243797 (7th Cir. Mar. 28, 2014), a Seventh Circuit panel narrowly construed the Foreign Trade Antitrust Improvements Act’s (FTAIA’s) domestic effects exception, holding that the FTAIA barred Motorola’s price-fixing claims based on its foreign affiliates’ overseas purchases of liquid crystal display (LCD) panels that were incorporated into cell phones abroad and sold in the United States.

This article sets forth a brief summary of the FTAIA followed by a closer look at the Seventh Circuit’s decision in Motorola and its potential impact on the interpretation of the Sherman Act and the FTAIA.

What is the FTAIA?

The FTAIA, enacted in 1982, generally makes the Sherman Act inapplicable to foreign anticompetitive conduct unless certain exceptions are satisfied. One of those exceptions, the “domestic injury” or “domestic effects” exception, allows for the application of U.S. antitrust law if the conduct at issue (1) “has a direct, substantial, and reasonably foreseeable effect” on U.S. commerce, and (2) “such effect gives rise” to the plaintiff’s claim.

Courts are split on what constitutes a “direct” effect under the FTAIA. The Ninth Circuit has considered an effect “direct” if it followed as an “immediate consequence” of the anti-competitive conduct, meaning “without deviation or interruption.” Before Motorola, the Seventh Circuit had adopted a broader interpretation of directness, holding that anti-competitive conduct that occurs abroad must have only a “reasonably proximate causal nexus” with the alleged U.S. domestic effects of that conduct in order to be direct. In Motorola, the Seventh Circuit takes a more pragmatic approach to the FTAIA’s application discussed below.

The Seventh Circuit’s Decision in Motorola

In 2009, Motorola brought antitrust claims against major LCD manufacturers for allegedly fixing the prices of LCD panels used as a component in Motorola’s mobile phones. The district court dismissed a substantial majority of Motorola’s claims, and Motorola appealed to the Seventh Circuit. The Seventh Circuit panel affirmed the district court’s decision, finding that nearly all of Motorola’s purchases fell beyond the scope of U.S. antitrust scrutiny.

Specifically, Motorola sought to recover for three categories of purchases: (1) LCD panels imported into the United States (1 percent of purchases), (2) LCD panels purchased outside the United States by Motorola’s foreign subsidiaries that were used as inputs in finished products that Motorola later imported into the United States (42 percent of purchases), and (3) LCD panels purchased outside the United States that were used as components in finished products that were sold outside the United States (57 percent of purchases).

Consistent with the district court’s opinion, the Seventh Circuit held that the FTAIA barred the second and third categories of claims, leaving Motorola with only one percent of its claimed purchases of LCD panels. The court summarily dispensed with the “frivolous” category of claims (the third category) seeking damages based on panels incorporated into cellphones sold in foreign countries because those panels never entered into the United States.

The court’s finding as to the second category — that the panels purchased abroad by Motorola’s foreign subsidiaries and then incorporated into phones sold in the United States, did not meet the requirements of the domestic effects exception to the FTAIA — has created significant controversy. While acknowledging that there was “doubtless some effect” the defendants could have foreseen on U.S. trade, the court concluded that the effect on U.S. commerce was too remote, as the “effect of component price fixing on the price of the product of which it is a component is indirect.” 

The court also held that this category of purchases failed the other prong of the domestic effects exception to the FTAIA — that the effect on U.S. commerce “give rise” to the plaintiff’s antitrust claim. The court concluded that Motorola’s claim was based “on the effect of the alleged price fixing on Motorola’s foreign subsidiaries” — subsidiaries that could seek their own remedies in the countries in which they operate, and if those countries do not offer adequate remedies, that was a risk Motorola, as the parent company, knowingly and voluntarily assumed.

The court expressed particular concern with the practical implications of Motorola’s expansive interpretation of the domestic effects exception, which would, according to the court, “enormously increase the global reach of the Sherman Act, creating friction with many foreign countries and resentment at the apparent effort of the United States to act as the world’s competition police officer”— a primary concern of the FTAIA.

The Potential Impact of Motorola

The Seventh Circuit’s limited view of the domestic effects exception to the FTAIA could have substantial impact on future civil and criminal cases alleging price fixing of component parts in foreign markets, a growing area of litigation activity. As the Seventh Circuit noted, “[n]othing is more common nowadays than for products imported to the United States to include components that the producers had bought from foreign manufacturers.”

Undoubtedly, there will be more developments in this area of the law. Both the U.S. Department of Justice and the Federal Trade Commission have already weighed in on the Motorola decision, urging the Seventh Circuit to rehear the case en banc because they claim it threatens the government’s enforcement efforts related to foreign cartels.

Although Motorola is likely to be a key precedent cited by counsel defending businesses and their executives against foreign-based civil and criminal cartel allegations, the opinion could raise some concern for in-house counsel of companies with supply chains or subsidiaries abroad. The U.S. antitrust laws may not protect companies that participate in foreign markets from anticompetitive conduct that takes place abroad, and foreign competition laws are often much less strict. According to the Seventh Circuit, that may be the case even if the anticompetitive actor knows that a final product will be eventually sold in the United States.

Published in The Antitrust Counselor, Volume 84, June 2014. © 2014 by the American Bar Association.