The Foreign Trade Antitrust Improvements Act: A Recent Take in the S.D.N.Y.

The Foreign Trade Antitrust Improvements Act (“FTAIA”) removes from the ambit of the Sherman Antitrust Act otherwise actionable anti-competitive conduct abroad that does not have a “direct, substantial, and reasonably foreseeable” effect on domestic commerce. Questions persist as to what effects qualify as being sufficiently “direct” and also whether the FTAIA is jurisdictional in nature or goes to the substantive merits of a claim. A recent decision out of the Southern District of New York addressed both questions in dismissing an antitrust suit brought by one Chinese corporation against its Chinese competitors.

The litigants in Lotes Co. v. Hon Hai Precision Industry Co. produce USB 3.0 connectors that link peripherals, like printers, monitors, and keyboards, to notebook and desktop computers made in China and sold in the U.S. As part of the standard-setting process by which the USB 3.0 became the industry standard for connectors of this type, defendants agreed to license to any entity that wanted to adopt the 3.0 standard, like plaintiff Lotes, the patents defendants contributed to facilitate its creation. Lotes, however, alleged that defendants refused to grant it a license in these patents and, in fact, brought two patent infringement suits in China against Lotes subsidiaries to enjoin Lotes from making certain USB 3.0 connectors. Such conduct, Lotes claimed, was designed to foreclose it from relevant markets and confer on defendants monopoly status.

The Court held that defendants’ alleged anticompetitive conduct was not subject to the Sherman Act because it was not covered by the FTAIA. Adhering to Second Circuit precedent holding that the FTAIA sets forth the standard for determining when subject-matter jurisdiction exists to adjudicate a foreign-based violation of the Sherman Act, the Court dismissed plaintiff’s claims for lack of subject- matter jurisdiction under Fed. R. Civ. P. 12(b)(1) rather than for failure to state a claim under Fed. R. Civ. P. 12(b)(6). Notably, however, the Court acknowledged the circuit split on this issue, recognizing that the Second and Ninth Circuits view the FTAIA as a jurisdiction-defining statute while the Third and Seventh Circuits regard the FTAIA as imposing an additional substantive element on an antitrust claim.

The FTAIA did not confer jurisdiction here, the Court found, because the conduct at issue had at most a “ripple effect” on prices of computer goods in the U.S. that was too attenuated to constitute the “direct” effect required by the FTAIA. The price of domestic computer products is a function of many market factors, only one of which is the price that producers of USB 3.0 connectors charge computer makers in China. Thus, while defendants’ alleged anticompetitive conduct towards Lotes in China may have had an indirect effect on prices paid by consumers of notebook and desktop computers here in the U.S., that effect, the Court concluded, was neither quantifiable nor did it establish the proximate cause required by the FTAIA. Because the Court lacked jurisdiction under the FTAIA, it also declined to exercise supplemental jurisdiction over Lotes’ state law contract and tort claims.

Whether Lotes is the case the Supreme Court uses to resolve the circuit split over the scope of the FTAIA remains to be seen. More certain, however, is that anticompetitive conduct overseas that has a mere indirect, or “ripple,” effect on prices in the U.S. likely is not actionable under the FTAIA.

Kevin R. Reich is an Associate in the Gibbons Business & Commercial Litigation Department.
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