Antitrust law - Second Circuit interprets the Foreign Trade Antitrust Improvements Act as requirement for establishing jurisdiction in U.S. courts.

Author:Durkin, Ashley
Position:Case note


The Foreign Trade Antitrust Improvements Act of 1982 (FTAIA) provides that the Sherman Act "shall not apply to conduct involving trade or commerce ... with foreign nations," but sets forth exceptions when "conduct has a direct, substantial, and reasonably foreseeable effect" on foreign imports, domestic commerce, or American exports. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) in Lotes Co., Ltd. v Hon Hai Precision Indus. Co. Ltd., (NOTEREF _Ref256116482 \h \* MERGEFORMAT) the Plaintiff, Lotes Co. Ltd. (Lotes), alleged the Defendants, Hon Hai Precision Industry Co. Ltd (Hon Hai) and Foxconn (Kunshan) Computer Connector Co., Ltd. (Foxconn), violated sections one and two of the Sherman Act. (NOTEREF _ReC56116482 \h \* MERGEFORMAT) The United States District Court for the Southern District of New York considered whether the FTAIA defines the requirements for foreign businesses to establish jurisdiction in U.S. courts or identifies the substantive elements of an antitrust claim. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) The court then determined whether the defendant's conduct in refusing to issue Lotes RAND-Zero licenses could be seen as having a "direct, substantial, and reasonably foreseeable effect" on domestic

commerce. (NOTEREF _ReC56116482 \h \* MERGEFORMAT) The District Court ultimately decided that due to the existing precedent in the Second Circuit, the court had to apply the statute as jurisdictional in nature and dismissed the claim for lack of subject matter jurisdiction (NOTEREF _Ref256116482 \h \* MERGEFORMAT)

Lotes and the defendants, Hon Hai and Foxconn, are Chinese corporations. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) Lotes competes directly with Foxconn and Hon Hai in China by producing USB 3.0 connectors and selling them to manufacturers that design computer products. NOTEREF _Ref256116482 \h \* mergeformat Both Lotes and the Defendants signed a Contributors Agreement and an Adopters Agreement on December 11, 2007 through the USB Implementers Forum, Inc (USB-IF). (NOTEREF _Ref256116482 \h \* MERGEFORMAT) The USB-IF established the technology standards for USB 3.0 connectors and in order for parties to adopt these technology standards, the USB-IF "require[s] technology-contributing parties agree to license all [their] incorporated technology on reasonable and non-discriminatory (RAND) terms." (NOTEREF _Ref256116482 \h \* MERGEFORMAT) In signing the agreements, "contributors" must grant any "[a]dopter" a "non-exclusive world-wide license under any Necessary claim of a patent or patent application ... on a royalty-free basis and under otherwise reasonable and nondiscriminatory ('RAND-Zero') terms " (NOTEREF _Ref256116482 \h \* MERGEFORMAT)

Lotes tried to negotiate with Hon Hai on more than one occasion concerning the RAND-Zero licensing terms in the Contributors and Adopters Agreement. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) Hon Hai, however, refused to license the USB 3.0 standard patents to Lotes and instead, Foxconn brought two patent infringement suits against two of Lotes' subsidiaries in China, which prevented Lotes from manufacturing the USB connectors. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) in the proceedings, Foxconn only alleged infringement on two of the thirteen types of the USB 3.0 connectors Lotes manufactures. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) Lotes claimed that the alleged infringed patents are "Necessary Claims" and "Contributions" per the Contributors Agreement and "therefore must be licensed to Lotes [under] the RAND-Zero terms." (NOTEREF _Ref256116482 'h \* MERGEFORMAT) Additionally, while none of the parties "directly sell any USB 3.0 connectors in the United States," Lotes also argued that Defendants' antitrust conduct violated sections one and two of the Sherman Act pursuant to FTAIA because Lotes believed Defendants' conduct caused prices to rise and stifled competition in the Unites States' USB 3.0 market. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) Lotes believed that the Defendants' actions were aimed at keeping Lotes out of competitive markets and were capable of restraining competitive manufacturing of USB 3.0 connectors, which would cause price increases in United States' products incorporating the USB 3.0 connectors (NOTEREF _Ref256116482 \h \* MERGEFORMAT)

The court first addressed the issue of whether the FTAIA establishes a substantive element of an antitrust claim, or whether the FTAIA is meant to provide subject matter jurisdiction for the courts. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) Acknowledging that current sentiment in the circuit may be pointing to the contrary, the court stated it was bound to the existing precedent in the Second Circuit and determined that the FTAIA outlines the elements to establish subject matter jurisdiction. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) Next, the court applied the FTAIA as a jurisdictional rule to Lotes' claims and determined whether the defendants' conduct has a " 'direct, substantial, and reasonably foreseeable effect' on domestic commerce" in the United States. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) The court determined there was no subject matter jurisdiction because the defendants' conduct was too attenuated and the effect was not "direct, substantial or reasonably foreseeable" in the United States. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) in determining that the FTAIA defines a jurisdictional requirement, the court ruled in favor of the defendant's motion to dismiss and dismissed the case for lack of subject matter jurisdiction (NOTEREF _Ref256116482 \h \* MERGEFORMAT)

The U.S. Congress enacted the Sherman Antitrust Act in 1890 for the purpose of protecting consumers in the U.S. economy by prohibiting the creation of monopolies and restrictions on trade. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) Courts since have had difficulty defining and applying how, if at all, the statute should be applied to conduct occurring in foreign territories. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) The Supreme Court first applied the Sherman Act in American Banana Co. v. United Fruit Co., where the Court declined to extend the reach of the Act to anti-trust conduct in the banana industry in Costa Rica, stating that whether an act is lawful must be determined by the law of the country where the act occurred. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) As America became more involved in the international economy, the Supreme Court began to relax the strict rule expressed in American Banana and eventually began expanding the Sherman Act to apply outside of the United States in limited circumstances. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) After years without a decisive test, the Second Circuit sought to provide one and brought forth a two-pronged approach to analyze alleged extraterritorial Sherman Act violations, considering whether the conduct abroad was intended to affect U.S. imports and whether it actually did affect them. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) This analysis, provided in United States v. Aluminum Co. of America, shifted the focus from the location of the alleged conduct to the location of the conduct's effect (NOTEREF _Ref256116482 \h \* MERGEFORMAT)

In an effort to provide clarification for when antitrust liability attaches to international conduct and to reduce the number of cases brought by foreign parties involving only minor effects on domestic commerce, Congress enacted the FTAIA in 1982 as an exception to the Sherman Act. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) The FTAIA states that the Sherman Act does not apply to conduct involving (non-import) trade or commerce with foreign nations, unless the conduct has a "direct, substantial, and reasonably foreseeable effect" and the effect gives rise to a claim that falls within the Sherman Act's purview. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) However, the courts have shown difficulty in interpreting and applying this law. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) While Congress's goal in enacting the FTAIA was to improve clarity, its language has been described as "inelegantly phrased" and "[m]uddying the waters further" and has only created increased confusion. (NOTEREF _Ref256116482 \h \* MERGEFORMAT) The foremost confusion exists in regards to whether the purpose of the FTAIA is to establish federal court subject-matter jurisdiction...

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