Appellate Courts Grapple With the Foreign Trade Antitrust Improvements Act—plaintiffs' Perspective

• Jurisdiction: United States,Federal
• Author: By Craig C. Corbitt and Aaron M. Sheanin
• Publication year: 2014
• Citation: Vol. 23 No. 2

APPELLATE COURTS GRAPPLE WITH THE FOREIGN TRADE ANTITRUST IMPROVEMENTS ACT—PLAINTIFFS' PERSPECTIVE

By Craig C. Corbitt¹ and Aaron M. Sheanin²

I. INTRODUCTION

Today's consumer products — from cutting-edge electronic devices to automobiles, and the components in them — are manufactured largely outside the United States. "Nothing is more common nowadays than for products imported to the United States to include components that the producers had bought from foreign manufacturers."³ But the rise of these globalized supply chains comes with an unexpected cost for American consumers: "As a result, the prices of many products exported to the United States are elevated to some extent by price fixing or other anticompetitive acts that would be forbidden by the Sherman Act if committed in the United States."⁴

In industries as diverse as computer chips, display technologies (both flat-panel and tube varieties), and auto parts (from ball bearings to wire harnesses), long-running, foreign-based cartels have taken hold in recent years and reaped billions of dollars from American consumers who bought finished products containing price-fixed components.⁵ As these cartels have been uncovered, often as a result of a cartel member voluntarily confessing to the Antitrust Division of the U.S. Department of Justice under its leniency program, the consequences for foreign-based firms have been severe. The Antitrust Division has obtained, through plea agreements and convictions, record-breaking fines from foreign companies and has secured lengthy prison sentences for foreign nationals. In addition, civil plaintiffs (through class actions, "direct" actions by large intermediate purchasers, and state attorneys general acting pursuant to statutory and common law authority) have sued cartel members for the overcharges caused by the price-fixed component, and in many instances have obtained significant recoveries from the cartel participants.

[Page 1]

Recent government and private litigation has raised the issue of whether price-fixing agreements made by foreign companies in foreign countries, particularly those agreements to fix the prices of component parts rather than the end-products that are eventually sold to American consumers, are subject to federal and state antitrust laws. The statute enacted to address this question under the Sherman Act, the Foreign Trade Antitrust Improvements Act of 1982 ("FTAIA"),⁶ has proven so inscrutable that it has caused several Courts of Appeals recently to revise (and sometimes reverse) previous pronouncements regarding the application of U.S. antitrust law to foreign conduct. Most colorfully, the Seventh Circuit, after issuing and withdrawing a series of unusual orders, agreed to have a panel including Judge Posner re-hear a recent FTAIA case involving Motorola Mobility LLC, ("Motorola"). With all this upheaval and some inconsistent results, a trip to the Supreme Court — which has not parsed the FTAIA in a decade⁷ — looks likely in the near future. This article discusses some of these recent and anticipated developments. The authors typically represent plaintiffs, and this article and opinions expressed reflect that point of view.

II. THE FTAIA AND EARLIER CASELAW

Congress enacted the FTAIA in 1982 in "respon[se] to concerns regarding the scope of the broad jurisdictional language in the Sherman Act."⁸ The FTAIA "initially lays down a general rule placing all (nonimport) 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 a 'direct, substantial, and reasonably foreseeable effect' on American domestic, import, or (certain) export commerce, and (2) has an effect of a kind that the antitrust law considers harmful, i.e., the 'effect' must give rise to a [Sherman Act] claim.'"⁹ As the Supreme Court explained, "the 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 (say, joint-selling arrangements), however anticompetitive, as long as those arrangements adversely affect only foreign markets."¹⁰

[Page 2]

III. THE LCD CARTEL LITIGATION

The TFT-LCD litigation, including criminal cases brought by the U.S. Department of Justice and civil cases brought by various private plaintiffs at all levels of the distribution chain, has generated the most opinions and turmoil so far. This massive, multidistrict litigation, first initiated in late 2006 and still ongoing, concerns a cartel among Thin-Film-Transistor Liquid Crystal Display ("TFT-LCD") panel manufacturers located in South Korea, Japan, and Taiwan. Some of the defendants, e.g., Samsung, LG, and Sharp, are vertically integrated, so that some of the panels affected by the cartel were incorporated into televisions, computer monitors, laptops, cell phones and other products sold by their subsidiaries or by third party resellers in the United States and elsewhere in the world. Other defendants, who are located in Taiwan, only made panels and did not incorporate them into their own subsidiaries' products. Some of those panels were bought by the vertically-integrated defendants, while others were sold to third parties in Asia who assembled the consumer products but were not part of the conspiracy. Some of those products were eventually sold in the United States, while others were sold throughout the world. The distribution channels were multi-layered, non-uniform, and complex, such that the price-fixed panels may have passed through many different levels before reaching the ultimate consumers who bought the finished products.

Complaints for damages and injunctive relief were filed by classes of direct purchasers under federal antitrust law and by indirect purchasers (invoking Class Action Fairness Act diversity jurisdiction)¹¹ under state Illinois Brick repealer laws, including the California Cartwright Act and Unfair Competition Law. Judge Susan Illston, Northern District of California, denied defendants' FTAIA dispositive motions in the class actions, at both the pleading and summary judgment stages. Especially in the indirect purchaser case, defendants stressed the complex nature of the distribution chain, and argued that the effect therefore was not "direct" as required by the statute. The indirect purchasers emphasized the evidence that the defendants knew that their agreements on LCD panel prices would cause higher prices for products sold in the U.S., and that they tracked those increases to make sure that their agreement was working as intended. The indirect purchasers also pointed to evidence that most defendants had U.S. subsidiaries and employees who facilitated the agreements in some manner, that the defendants dealt directly with original equipment manufacturers (OEMs) in the U.S. who sold products to class members, and that the companies which pleaded guilty to participating in unlawful cartel activity admitted as part of their guilty pleas that commerce in the United States was affected. Finally, the indirect purchasers argued that whatever the FTAIA's effect on a Sherman Act claim, the FTAIA should not be applied to the Cartwright Act and the other state law claims alleged in the case.¹² The court concluded that conduct had a direct effect on U.S. commerce, and on that basis denied the motion. The court did not address the merits of the issue of whether the FTAIA applies to state law claims.¹³

[Page 3]

A. The Motorola Case in the LCD Multi-District Litigation

A number of companies opted out of one or both of the LCD class actions and filed as direct action plaintiffs. Some direct action plaintiffs, including Motorola, also alleged a conspiracy by the same defendants to fix prices for smaller panels used in cellphones. Motorola's complaint was originally filed in 2009 in the Northern District of Illinois, where it is headquartered, and its case was transferred by the Judicial Panel on Multi-District Litigation to Judge Illston for pretrial proceedings.

Motorola's foreign subsidiaries assigned their claims to the parent company. Although these subsidiaries directly purchased and received delivery of the panels from the defendants, the parent Motorola alleged that it directed and approved the prices and quantities of panels purchased by those subsidiaries. Motorola alleged injury for three categories of panel purchases: "(1) LCD Panels delivered by the Defendants to Motorola in the United States; (2) LCD Panels delivered to Motorola manufacturing facilities abroad for inclusion in Motorola devices imported into the U.S. by Motorola and later sold by Motorola to customers in the United States; and (3) LCD Panels delivered to Motorola manufacturing facilities abroad for inclusion in Motorola devices sold to Motorola customers abroad."¹⁴The second and third categories were the so-called "foreign injury claims" at issue in the various FTAIA motions.

Defendants moved to dismiss Motorola's foreign injury claims. In In re TFT-LCD (Flat Panel) Antitrust Litig., 2010 WL 2610641 (N.D. Cal. 2010) [hereinafter Motorola I], Judge Illston granted the defendants' motion to dismiss to the extent it was based on foreign injury caused by foreign purchases of LCD panels and products (Categories 2 and 3 above). The court first rejected Motorola's contention that the products that were ultimately imported were not covered by the FTAIA. The court reasoned that the conduct of the defendants at issue for sales to the foreign subsidiaries did not involve importing. The court also agreed with the defendants that "the amended complaint does not allege any facts showing how Motorola's foreign injuries were proximately caused by any domestic effects of defendants conduct...Motorola's complaint generally alleges that defendants engaged in a 'global conspiracy' that impacted 'global prices' and that Motorola's...