The Northern District of California Opens Its Doors to the World's Civil Antitrust Disputes

• Publication year: 2015
• Author: By Lee F. Berger and Sophie J. Sung

THE NORTHERN DISTRICT OF CALIFORNIA OPENS ITS DOORS TO THE WORLD'S CIVIL ANTITRUST DISPUTES

By Lee F. Berger and Sophie J. Sung¹

I. INTRODUCTION

Policy choices dominate antitrust law. The U.S. Supreme Court made a policy choice, enshrined in its Illinois Brick decision, that under federal antitrust law, only direct purchasers have standing to bring claims, and that under Hanover Shoe, those direct purchasers may recover for 100% of the overcharge—empowering the direct purchasers to enforce the antitrust laws and avoid the complexities of pass-on calculations. The U.S. Congress made another policy choice, enshrined in the Foreign Trade Antitrust Improvements Act ("FTAIA"), that U.S. antitrust law would be applied within the United States, and only reach outside the United States when activity in foreign commerce had a direct effect on U.S. commerce.

Each of these two doctrines is meant to be read narrowly, with few and strict exceptions. Yet in the last two years, these two doctrines have been expanded beyond their intended ranges under Northern District of California precedent. As to the bar on indirect purchasers, the Ninth Circuit recognized an exception permitting indirect purchasers to sue when they purchased their product from an innocent direct purchaser which is owned or controlled by a conspirator. The Northern District of California recently doubled that exception, extending it to instances in which the ownership or control relationship exists in the opposite direction, that is, the innocent direct purchaser owns or controls the conspirator. As to the bar on extraterritorial application, the Northern District of California has improperly expanded the "import commerce" exception to the FTAIA to include instances in which the conspiracy occurred in some part in import commerce, even if the plaintiff did not purchase the product in import commerce.

When these expansive precedents are employed together, an unintentionally broad level of antitrust standing for a certain category of potential civil antitrust plaintiffs arises: foreign corporations, engaging in foreign commerce, who have claims based on foreign purchases, can bring direct purchaser claims for their foreign purchases under U.S. antitrust law. This development contradicts the purpose of both Illinois Brick and the FTAIA. The Northern District of California has gone too far.

The Seventh Circuit, when looking at the same issues in the context of the same conspiracy, decided that disputes between foreign parties regarding purchases occurring abroad should be decided under the laws of those foreign nations, not under the Sherman Act. The Ninth Circuit would be wise to follow the Seventh Circuit here.

Section II of this article discusses the Ninth Circuit's recent consideration of the FTAIA's limits in the criminal conspiracy case of United States v. Hsiung, and the application of Hsiung in the civil context. Section III presents the background of Illinois Brick and its federal bar on indirect purchaser claims, and examines the current contours of the "ownership and control" exception to the Illinois Brick bar as applied by the Ninth Circuit and its district courts. Section IV examines the intersection of the "ownership and control" exception and the holding of Hsiung, as applied by district courts in the Ninth Circuit. Section IV also examines how the Seventh Circuit has approached the question of the proper reach of U.S. antitrust laws in the Motorola Mobility litigation.

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II. THE FOREIGN TRADE ANTITRUST IMPROVEMENTS ACT

Congress enacted the FTAIA² in 1982 as a limit on the extraterritorial reach of the Sherman Act and the Federal Trade Commission Act.³ The FTAIA prohibits the application of U.S. antitrust law to conduct taking place in foreign commence or in export commerce; it permits the application of U.S. antitrust law to conduct taking place in domestic commerce or import commerce. Excepted from the prohibition on the application of U.S. antitrust law to conduct in foreign commerce is conduct that has a "direct, substantial, and reasonably foreseeable effect" on domestic or import commerce, if such effect gives rise to a Sherman Act claim.⁴

Since the FTAIA's enactment, courts have struggled to define the precise scope of the exception for "import commerce."

A. United States v. Hsiung

In United States v. Hsiung,⁵ the Ninth Circuit upheld the criminal convictions of a Taiwanese electronics manufacturer and two of its executives. The U.S. Department of Justice had alleged that, in a conspiracy spanning more than four years, the defendants conspired with Taiwanese and Korean electronics manufacturers to fix prices of thin film transistor liquid crystal display ("LCD") panels, a display technology incorporated in LCD products such as computers and television monitors.⁶ Ultimately, the LCD panels were sold to companies in the United States and to companies abroad. The DOJ charged the defendants with conspiracy to fix prices of LCD panels in violation of the Sherman Act. Rejecting the defendants' motion to dismiss the indictment, the district court held that "the [FTAIA] is inapplicable to [the] import activity conducted by defendants."⁷ A jury found the defendants guilty.⁸

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On appeal, the Ninth Circuit affirmed the district court's decision that the conduct involved import commerce, and therefore the FTAIA limited the Sherman Act's application to the defendants' conduct.⁹ The court held that the defendants' conduct constituted import trade because they "engaged in the business of producing and selling LCDs to customers in the United States,"¹⁰ insofar as there was some direct importation of foreign LCD panels into the United States.¹¹ Responding to the defendant's contention that it was not an importer, the Ninth Circuit explained that the argument "misses the point" and that the relevant fact was that "the panels were sold in the United States, falling squarely within the scope of the Sherman Act."¹² A defendant does not technically need to be an "importer" to engage in import commerce. The relevant inquiry, the court found, centers on whether the defendant directly imported at least some products to the United States.¹³

B. The Northern District of California Misapplies Hsiung in Civil Context

Before Hsiung, courts in the Northern District of California applied the FTAIA's import exception in civil cases to those purchases the plaintiffs made in import commerce, not to purchases made in foreign commerce.¹⁴ But the Northern District of California has read Hsiung to change that interpretation, permitting under import exception any civil claim regarding a conspiracy that took place in part in import commerce, even claims for purchases of price-fixed products abroad. This interpretation confuses the application of criminal and civil case law, and renders the FTAIA almost impotent in the age of global price-fixing conspiracies.

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In a separate civil litigation involving the same LCD price-fixing cartel at issue in Hsiung, plaintiff TracFone brought a claim under Florida state law.¹⁵ TracFone was an indirect purchaser—it purchased handsets from Motorola and Nokia, who had purchased LCD panels from the defendants and incorporated them into the products that TracFone purchased.

In the district court's view, Hsiung short-circuited any application of the FTAIA to Florida state law. The Hsiung court had found that, for the same underlying conspiracy, "defendants' conduct was outside of FTAIA's scope because 'the conspiracy's intent, as alleged, was to 'suppress and eliminate competition' by fixing prices for panels that [defendants] sold to manufacturers 'in the United States and elsewhere.''"¹⁶ The district court interpreted Hsiung's finding to mean that as long as a conspiracy intended to impact import commerce, then the import exception applies, even if the plaintiff's purchases were not in import commerce.¹⁷

The district court obscured Hsiung's central holding while broadly expanding the Sherman Act's extraterritorial application. When evaluating the Hsiung case, it is important to keep in mind its context: the decision concerns a criminal conviction. Even if the defendants conspired regarding the price of only a single LCD panel subject to the Sherman's Act territorial jurisdiction, there is a violation of the Sherman Act. Thus, the question of the relevance of a particular imported LCD panel to the case is immaterial—any imported LCD panel is sufficient to give rise to a criminal conviction. In Hsiung, there was no dispute that there were some LCD panels that were imported into the United States, and that is all that is required for the criminal conviction.¹⁸

In contrast, in the civil context the central evidentiary question is not whether some portion of the underlying conspiracy occurred in import commerce, but whether a defendant's business activities at issue in the plaintiffs' specific claims occur in import commerce. The FTAIA's import exception, by its terms, applies only to plaintiffs' purchases made in import commerce.¹⁹ Nothing in Hsiung changes this, because Hsiung was decided solely within the criminal context, where the central issue is one of whether there was even a single violation of the Sherman Act sufficient to justify conviction.

The implications here are difficult to limit. Given the size of the U.S. economy and the global nature of many price-fixing conspiracies, virtually any conspiracy will have some effect on U.S. import commerce. That means that any civil plaintiff, including a foreign defendant, could sue for purchases made entirely in foreign commerce simply because that conspiracy somehow touched U.S. import commerce. If followed, this ruling renders the FTAIA's limitations as no limit at all.

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III. INDIRECT PURCHASER CLAIMS BARRED TO PROMOTE ENFORCEMENT AND LIMIT DIFFICULT PASS-ON ANALYSES

Two Supreme Court decisions, Hanover Shoe²⁰ and Illinois Brick,²¹ set out the Supreme Court's policy on U.S...