2nd Circuit Decision In Lotes Clarifies FTAIA’s Effect On The Extraterritorial Reach Of The Sherman Act, But Leaves Unresolved The Status Of Claims Based On Importation Of Products Containing Price-Fixed Components

Long-simmering issues concerning the applicability of the Sherman Act to foreign conduct under the Foreign Trade Antitrust Improvements Act, 15 U.S.C. § 6a (FTAIA), were addressed in the June 4, 2014 decision of the 2nd U.S. Circuit Court of Appeals in Lotes Co., Ltd. v Hon Hai Precision Industry, Co., Ltd, et al., No. 13-2280 (2d Cir. June 4, 2014). Decisive in tone but offering limited guidance for the future, the decision addresses several issues for which there are inconsistent decisions—or at least a lack of consensus—among the courts of appeals and the district courts. The question of the Sherman Act's extraterritorial reach is of increasing importance as private litigation over international cartel conduct remains very active, and claims of injuries in the U.S. attributable to competitive conditions outside the country become more and more a hallmark of the global supply chain. Lotes is the first of three appellate decisions regarding the FTAIA expected this year or next year; the others are from the 9th Circuit in United States v. Leung,1 and from the 7th Circuit in Motorola Mobility,2 where various parties have sought en banc reconsideration of an opinion discussed below.

The Holdings in Lotes

In Lotes, the 2nd Circuit held that (1) the requirements of the FTAIA are substantive and not jurisdictional; (2) foreign anticompetitive conduct can meet the FTAIA's "direct, substantial, and reasonably foreseeable effect" test so long as there is a "reasonably proximate causal nexus between the conduct and the effect"; (3) under the facts pleaded in the case, the FTAIA's test that the effect "gives rise to a claim under" the Sherman Act was not satisfied; and (4) a private agreement suggesting that the Sherman Act would apply to the parties' relationship did not constitute a "waiver" of elements of the FTAIA or otherwise allow suit in the U.S. courts under the Sherman Act.

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Background

Plaintiff Lotes is a Taiwanese corporation that designs and manufactures Universal Serial Bus (USB) connectors that are components in computers, smartphones, computer peripherals and other electronic devices. Defendants are a group of companies that compete with Lotes in the design and manufacture of USBs, but also produce devices (such as personal computers and peripherals) that incorporate USBs. Lotes and the defendants are members of a trade group that produced a technical standard, USB 3.0, for a new generation of USBs. All participants agreed as a condition of their membership in the standard-setting organization to make available to all other members royalty-free, reasonable and nondiscriminatory (RAND-Zero) license terms for any patents required to satisfy the new standard. Lotes alleged that the defendants breached their obligations to provide RAND-Zero licenses and took steps—including marketplace communications and patent infringement suits in China—to marginalize Lotes as a potential competitor and to secure for the defendants a dominant position that would result in higher USB prices worldwide, including in the U.S. Lotes sued the defendants in...