Motorola and the Extraterritorial Application of US Antitrust Laws to Foreign Component Price Fixing Cartels

Last month the Supreme Court declined to accept an appeal for two related antitrust cases involving an international price-fixing cartel.  The cases come from different circuits, one was criminal and the other civil, but they involve the same scheme by a group of Asian manufacturers to rig the prices of liquid-crystal display screens used in computers and cellphones.

The criminal case resulted in convictions, prison time, guilty pleas, settlements and large fines.  The follow-on civil case, brought by Motorola, was dismissed because the court found that US antitrust law did not allow a suit to recover damages from the high prices charged to Motorola's foreign subsidiaries, despite the fact that a large percentage of the phones assembled overseas were subsequently sold in the United States.

Under the Foreign Trade Antitrust Improvements Act of 1982, US antitrust law applies to anticompetitive activities outside the US when (1) the foreign conduct has a direct, substantial and reasonably foreseeable effect on US domestic commerce or import trade and (2) the effect gives rise to a claim under the Sherman Act.

The Seventh Circuit's decision, authored by Judge Richard Posner, held that Motorola Mobility, LLC, a US-based technology company, could not recover damages incurred on behalf of its foreign subsidiaries given that they were independent legal entities for tax purposes and the foreign subsidiaries were the direct purchasers of the LCD screens under Illinois Brick.  See Motorola Mobility, LLC v. AU Optonics, No. 14-8003 (7th Cir. Nov. 26, 2014).

In addition to lack of standing under the indirect purchaser doctrine, Judge Posner's opinion discussed the jurisdictional reach of US antitrust law:

The Supreme Court has warned that rampant extraterritorial application of US law "creates a serious risk of interference with a foreign nation's ability independently to regulate its own commercial affairs." [quoting from the Empagran case] ...

Motorola’s foreign subsidiaries were injured in foreign commerce—in dealings with other foreign companies—and to give Motorola rights to take the place of its foreign companies and sue on their behalf under U.S. antitrust law would be an unjustified interference with the right of foreign nations to regulate their own economies. The foreign subsidiaries can sue under foreign law—are we to presume the inadequacy of the antitrust laws of our foreign allies? Would such a presumption be consistent with international comity, or more concretely with good relations with allied nations in a world in turmoil? To quote from the Empagran opinion again, “Why should American law supplant, for example, Canada’s or Great Britain’s or Japan’s own determination about how best to protect Canadian or British or Japanese customers from anticompetitive conduct engaged in significant part by Canadian or British or Japanese or other foreign companies?”

After finding that Motorola's private lawsuit for damages had no merit, Judge Posner noted that the Justice Department filed an amicus brief arguing that the Justice Department would have jurisdiction to investigate and criminally prosecute under US antitrust laws conduct that has a direct, substantial and reasonably foreseeable effect on domestic US commerce.  A price-fixing scheme involving component parts that were assembled overseas with the resultant product sold into the United States may satisfy this jurisdictional test, even if Motorola itself did not have standing to pursue its damges claim.  While the Justice Department may be able to prosecute foreign price-fixing cartels, and indeed did so in the related criminal case, that does not mean the same conduct gives rise to antitrust damages remedy for US-based companies, like Motorola, who were only derivatively injured by the price-fixing cartel.

The bottom line seems to be that the Government can bring some antitrust cases when private plaintiffs cannot, and US companies that chose do to business through foreign subsidiaries cannot "pick and chose from the benefits and burdens of United States corporate citizenship."

The Supreme Court denied to accept the appeals from either the criminal case or the civil case, thus leaving these cases (and the lessons from them) intact.  More information can be found in this New York Times article and Wall Street Journal article.

Supreme Court Creates New Standing Test For Asserting False Action Claim Under Lanham Act

On March 25, 2014, the Supreme Court issued a unanimous opinion, authored by Justice Scalia, in Lexmark International, Inc. v. Static Control Components, Inc.  In a previous post, I discussed my involvement in this case at the trial court level.

Supreme Court Justice Scalia

The case involves the standing requirements for asserting a claim for false advertising under the Lanham Act.  There was an existing split among the regional circuits, with some courts limiting standing to direct competitors, other courts adopting the standing analysis from antitrust cases, and other courts applying a broader "reasonable interest" test.  The Supreme Court, however, rejected all of these standards and created a new "zone of interests" test, explaining:

While none of those tests is wholly without merit, we decline to adopt any of them. We hold instead that a direct application of the zone-of-interests test and the proximate-cause requirement supplies the relevant limits on who may sue.

The "zone of interests" test originates from cases interpreting standing to seek judicial review under the Administrate Procedures Act.  The Court, however, held that this test also applies to other statutorily created causes of action, like the Lanham Act.  The Court further stated:

We thus hold that to come within the zone of interests in a suit for false advertising under §1125(a), a plaintiff must allege an injury to a commercial interest in reputation or sales. A consumer who is hoodwinked into purchasing a disappointing product may well have an injury-in-fact cognizable under Article III, but he cannot invoke the protection of the Lanham Act—a conclusion reached by every Circuit to consider the question....  Even a business misled by a supplier into purchasing an inferior product is, like consumers generally,not under the Act’s aegis.

With respect to the proximate cause analysis, the Court held:

that a plaintiff suing under §1125(a) ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising; and that that occurs when deception of consumers causes them to withhold trade from the plaintiff.

The Court's new "zone of interests" test appears to be broader than some of the tests used by lower courts but more narrow that others.

In reaching its decision, the Supreme Court critiqued the various multifaceted tests that lower courts previously had used, noting that these "open-ended balancing tests can yield unpredictable and at times arbitrary results."  It will be interesting to watch if this decision leads to broader changes in the standing requirements for other statutory causes of action.

For example, the traditional standing test for antitrust claims was one of the "open-ended balancing tests" that the Court critiqued.  Does this case forecast a change to standing principles under antitrust law?

Supreme Court to Decide Requirements for Standing under Lanham Act

In the coming weeks, the Supreme Court will decide a case involving the proper framework for determining standing to maintain an action for false advertising under the Lanham Act.  The case, Lexmark International, Inc. v. Static Control Components, has a long history, in which I played a role nearly eight years ago.  In fact, I believe that I drafted the motion to dismiss that is the subject of this appeal.

The District Court granted that motion, in September 2006, dismissing the antitrust and false advertising counterclaims for lack of standing based on the factors set forth in Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters.  After that decision, in 2007, there was a trial on the remaining claims, which resulted in a number of lengthy appeals.  In one of those appeals, on October 26, 2012, the Sixth Circuit reversed the District Court's ruling as to standing after finding that that the Associated General factors were not the proper analysis for a Lanham Act claim.

This decision added to an existing circuit split on the proper analytical framework.  The Third, Fifth, Eighth and Eleventh Circuits have adopted the Associated General factors; the Seventh, Ninth and Tenth Circuits have adopted a categorical test permitting suits only by an actual competitor; and the Sixth and Second Circuits have applied a more expansive "reasonable interest" test.

It is rather unusual for the Supreme Court to review a district court decision from way back in 2006.  I imagine that at the time the district court initially ruled on this issue, many of the cases that are now being cited and relied upon by both parties had not yet been decided.  It is also odd, on a personal level, to remember back eight years ago (before I had any children!) when I drafted that initial motion to dismiss.