Drop dead, the Seventh Circuit on November 26 told U.S. firms that want to collect treble damages under the Sherman Act for fixing prices on their foreign subs' purchases overseas.
Either have your subs buy the stuff in the U.S., the panel ruled, or purchase the goods for import into the U.S. yourself.
And quit your belly-achin', you could almost hear Circuit Judge (and antitrust maven) Richard Posner say.
The case that produced the Posner poke involved sales of liquid-crystal display panels by members of a price-fixing cartel. The price-fixers sold more than $5 billion worth of the panels to the Motorola phone-making enterprise, but only one percent of that amount went straight to the U.S. parent company; Motorola's non-U.S. subs bought the rest.
Motorola the parent joined with its overseas offspring in suing AU Optronics, Samsung, Sanyo, and other foreign members of the cartel. They noted, among other bits of proof, that a U.S. jury had already found AU Optronics guilty of fixing prices on LCD panels.
But, unlike the U.S. Department of Justice's Antitrust Division, Motorola and its subs had to prove not only that the bad conduct has a "direct, substantial, and reasonably foreseeable effect" on U.S. "trade or commerce", 15 U.S.C. 6a(1), but also that the "effect" on U.S. trade or commerce "gives rise to" the Sherman Act claim, id. 6a(2).These twin requirements of the Foreign Trade Antitrust Improvements Act (which Congress passed and President Ronald Reagan signed in 1982) doomed the claims by the non-U.S. Motorola entities to dismissal by the district court.
Without briefing or oral argument, the Seventh Circuit upheld the judgment. When Motorola protested, the same panel allowed both. But none of it mattered.
In Motorola Mobility LLC v. AU Optronics Corp., No. 14-8003 (7th Cir. Nov. 26, 2014), the court affirmed on the basis of the "gives rise to" prong of the FTAIA test. Judge Posner put a spotlight on the problem:
What trips up Motorola’s suit is the statutory requirement that the effect of anticompetitive conduct on domestic U.S. commerce give rise to an antitrust cause of action. 15 U.S.C. § 6a(2). The conduct increased the cost to Motorola of the cellphones that it bought from its foreign subsidiaries, but the cartel-engendered price increase in the components and in the price of cellphones that incorporated them occurred entirely in foreign commerce.
Motorola, slip op. at 6. The "price increase . . . occurred entirely in foreign commerce" because Motorola's foreign subs bought and took delivery of the LCD panels outside the U.S. That the cartel members knew the subs would send the panels to Motorola for resale in the U.S. might have met the "direct, substantial, and reasonably foreseeable effect" prong of the FTAIA, but it couldn't satisfy the one requiring the domestic effect to "give rise to" the antitrust claim, the panel held.
Forum Shopping and Illinois Brick
Judge Posner gave two main reasons for the ruling. He explained that Motorola chose to run its business overseas through non-U.S. subsidiaries and must therefore live with the consequences of that choice. "For example," he noted, "although for antitrust purposes Motorola contends that it and its subsidiaries are one . . . , for tax purposes its subsidiaries are distinct entities paying foreign rather than U.S. taxes." Motorola, slip op. at 7. "No doubt Motorola thinks U.S. antitrust remedies more fearsome than those available to its foreign subsidiaries under foreign laws", he added. "But that’s just to say that Motorola is asserting a right to forum shop." Id. at 8.
Nor did Motorola's position square with a bedrock doctrine of U.S. antitrust law — the "indirect purchaser" rule of Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). Illinois Brick "forbids a customer of the purchaser who paid a cartel price to sue the cartelist, even if his seller—the direct purchaser from the cartelist—passed on to him some or even all of the cartel’s elevated price." Motorola, slip op. at 9. The FTAIA's "gives rise to" requirement, Judge Posner urged, in effect enforces Illinois Brick's bar to damages suits by indirect purchasers.
Still, the Motorola opinion does leave a sliver of daylight for U.S. firms that buy components in foreign climes. The beam comes in the guise of the "pass-on defense" to Illinois Brick. As Judge Posner pointed out, the Court in Illinois Brick mentioned that a “situation in which market forces have been superseded and the pass‐on defense might be permitted is where the direct purchaser is owned or controlled by its customer.” Illinois Brick, 431 U.S. at 736 n.16. And a "customer" that "own[s] or control[s]" the "direct purchaser" sounds a lot like a parent company such as Motorola.
Judge Posner argued that the Illinois Brick exception may not matter, at least if you look at things from the subs' point of view:
Although Motorola, the “customer,” owns its foreign subsidiaries—the “direct purchasers” of the components—they are incorporated under and regulated by foreign law. What remedies they may have, if they overpay for inputs that they buy abroad, are determined not by U.S. anti‐trust law but by the law of the countries in which the subsidiaries are incorporated and are therefore citizens of, or the countries in which the price fixers they bought from operate, or the countries in which the purchases were made. And that is quite apart from Illinois Brick or other sources of U.S. anti‐trust law.
Motorola, slip op. at 12-13.
But that rationale doesn't quite hold up. What if the relevant sale came not when the foreign subs bought the panels overseas but when Motorola purchased the phones that featured the panels in the U.S. from those subs? Wouldn't that avoid the moral peril of letting foreign firms reap the tax and other benefits of their non-U.S. status while also permitting them to morph into U.S. entities for purposes of suing under the Sherman Act?
Yes, it would. But Motorola had long before chosen not to base its claim in the passing-on theory. As Judge Posner put it:
In any event Motorola waived in the district court any argument that it could base damages on the effect of the cartel’s pricing of components on the cost to Motorola of cell-phones incorporating those components. It argued only that its foreign subsidiaries overpaid for the LCD panels. How the overcharge may have affected Motorola’s cellphone business because of the component price fixing was a path that Motorola stepped off of after the pleadings.
Motorola, slip op. at 13-14.
A U.S. enterprise whose non-U.S. subs buy goods overseas thus may have a claim despite the FTAIA, but the enterprise must base its damages model on the passing-on of price-fixing overcharges by the subs to the parent.
What to do?
If your company finds itself on the losing end of an international cartel, you should think about asking for a consultation with an antitrust expert. In many instances, the potential recovery would easily justify the expense of having the expert take a close look at the potential claim.