Locke Lord QuickStudy: Doing the Hokey Pokey-Analyzing the Reach Of the Sherman Act

    Locke Lord Publications

    We all remember from childhood the time honored dance called the “hokey pokey”. As the lyrics go, “You put one foot in…you take one foot out…and you do the hokey pokey!” Well the United States District Court for the Northern District of Illinois, Eastern Division, in the case of Motorola Mobility, Inc. v. AU Optronics Corporation, Case No. 09-c-6610, seems to have perfected this childhood dance in analyzing the application of the Foreign Trade Antitrust Improvement Act (FTAIA) to the Sherman Act in its decision dated January 23, 2014. Section 6(a) of the FTAIA generally excludes conduct involving foreign trade or commerce. An exception to this rule exists for import trade or import commerce (one foot in…one foot out) with foreign nations if—(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; or (B) on export trade or commerce … and (2) such effect gives rise to a claim under the provisions of section 1 to 7 [of the Sherman Act].1

    This QuickStudy is to inform our foreign clients with operations in the U.S. about recent developments that could impact their conduct of business in the U.S. It is well known and understood that the antitrust laws have extra-territorial reach for foreign conduct that affects the U.S. domestically and violates the Sherman Act both criminally and civilly. In short, just because meetings may be held outside of the U.S. jurisdiction does not in any way insulate a foreign company from incurring U.S. liability. The Motorola case is important as it identifies what conduct overseas can give rise to corporate and individual liability in the U.S. Consequently, any meetings held abroad which results in decisions having an effect on the U.S. economy and giving rise to a Sherman Act violation can result in criminal and civil liability for both the company and its executives.2

    Motorola Mobility involved a price fixing claim for liquid crystal display (LCD) panels against AU Optronics, which had been found guilty of criminal price fixing in a trial that resulted in a $500 million fine and the imprisonment of two of its executives. The civil case was consolidated as a multi-district litigation (MDL) action in the Northern District of California, which denied the defendants’ motion for summary judgment. The defendants filed a motion for reconsideration in the U.S. District Court for the Northern District Of Illinois, which was the transferor court (i.e., the court in which the action was initially filed). This motion was granted and two of the plaintiff’s three claims, Category II and III, infra, were dismissed. These claims involved purchases of LCD panels, and according to the Court, fell into three categories:

    (1) purchases of LCD panels by Motorola that were delivered directly to Motorola facilities in the United States (Category I); (2) purchases of LCD panels by Motorola’s foreign affiliates that were delivered to the foreign affiliates’ manufacturing facilities abroad, where they were incorporated into mobile phones that were later sold in the United States (Category II); and (3) purchases of LCD panels by Motorola’s foreign affiliates that were delivered to the foreign affiliates’ manufacturing facilities abroad and were later incorporated into mobile phones sold outside the United States (Category III).

    (Memorandum Opinion and Order, p. 2, Jan. 23, 2014.) The claims of the foreign affiliates were assigned to Motorola.

    Discussion: Analysis
    Domestic Injury Exception and Import Exclusion3
    According to Professor Hovenkamp, courts interpreting the poorly worded FTAIA have generally required the plaintiff to show an injury, not merely to the plaintiff itself, but also to the trade or commerce of the United States. See, Paul M. Kaplan, Extra-Territorial Reach of U.S. Antitrust Laws to Foreign Firms, N.Y. L.J., at 3, (June 13, 2006).

    The underlying purpose of the FTAIA was to exclude from coverage of the Sherman Act any activity involving foreign trade. In short, the statute was intended to limit the scope of the Sherman Act as applicable to foreign commerce, generally; and to foreign injury, specifically. However, the domestic injury exception to the FTAIA has received more attention from the courts. As the Motorola Mobility court pointed out, “[t]he FTAIA seeks to make clear to American exporters (and to firms doing business abroad) that the Sherman Act does not prevent them from entering into business arrangements…, however anticompetitive, as long as those arrangements adversely affect only foreign markets” (Memorandum Opinion and Order, p. 10).

    The key consideration for the FTAIA domestic commerce exception is the establishment of foreign conduct that gives rise to a U.S. effect (a violation of the Sherman Act) and impact on the US economy. As was stated in In re Rubber Chemicals Antitrust Litigation, 504 F.Supp. 2d 777, 786 (N.D. Cal. 2007), “it must be the domestic effects of the defendants’ anticompetitive conduct, rather than the anticompetitive conduct itself, which gives rise to [a Sherman Act claim]” (emphasis in original).

    Finally, the Court in Motorola Mobility held that the import exclusion of the FTAIA was not applicable as the defendants did not import the panels into the U.S., but the plaintiff’s foreign affiliates did. Hence, such panels were not determined to be “imports”.

    By granting defendants’ motion for summary judgment, the court readily denied application of the FTAIA to goods sold outside the U.S., where there would be no effect on the U.S. economy, but also excluded goods that were sold in the U.S. because panels were delivered abroad to plaintiff’s foreign affiliates’ manufacturing facilities, where they were incorporated into mobile phones. The latter type of claims, Category II, in the Court’s view was inadequate to constitute a sufficient effect on the U.S. economy. The Court concluded, “The FTAIA applies to Motorola’s foreign injury claim because they are based on non-import conduct involving trade with foreign nations. These claims do not fall under the FTAIA’s domestic injury exception because they do not arise from any domestic effect.” Supra at 20.

    In a current Cartel case that the Firm is handling, the issue is whether there can be an effect on the U.S. economy where requests for quotes (RFQs) issued by a manufacturer in the U.S. are fulfilled abroad. While liability can be debated, what of the volume of commerce determination for assessing the criminal fine? Here is an example where the civil and criminal law meet. Stay tuned for the outcome. Our client, a Senior Executive of a U.S. subsidiary of a foreign corporation, has returned fortunately to his home country with the full knowledge of the DOJ. A final decision is pending now with the DOJ. The Locke Lord team consists of Paul Coggins.

    1 In F. Hoffman-LaRoche Ltd. v. Empagran S.A., ( the Court noted that the FTAIA “lays down a general rule placing all (non-import) 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 ‘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.” 542 U.S. 155, 162 (2004) “Empagran I”) (quoting 15 U.S.C. § 6a(1), (2)) (emphasis in original).
    2 According to the Sherman Act and the Antitrust Criminal Penalty Enhancement and Reform Act of 2004, Corporate Fines are set at the higher of $100 million or twice the gain or loss from the activity and Individual Fines are set at the higher of $1 million or twice the gain or loss, in addition to a maximum jail sentence of 10 years.
    3 The standard of review followed by the transferor court is the clear error standard. In other words, the transferor court is allowed to correct serious errors of the transferee court, as in this case where it misapplied the law in denying defendants’ motion for summary judgment.

    For more information on the matters discussed in this Locke Lord Quick Study, please contact the authors.


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