In a decision that could have far-reaching implications for U.S. companies and consumers, the Seventh Circuit Court of Appeals recently reiterated that the U.S. antitrust laws stop at the border and do not reach conduct that causes damages in the first instance outside the United States.
In Motorola Mobility LLC v. AU Optronics Corp., No. 14-8003, 2014 WL 6678622 (7th Cir. Nov. 26, 2014), issued shortly before Thanksgiving, the Court dismissed a Sherman Act Section 1, 15 U.S.C. § 1, claim brought by Motorola against members of the liquid crystal display (“LCD”) cartel and affirmed summary judgment for defendants.
The outcome may at first glance be perplexing. The existence of the cartel and its effect on the United States were not in dispute: most of the cartel members had already pled guilty to Sherman Act violations and paid a combined total of more than $250 million in criminal fines. Moreover, it was clear the cartel participants knowingly harmed Motorola and U.S. consumers. Indeed, Motorola directly negotiated purchase prices with cartel members and a substantial portion of the LCD panels it bought were incorporated into cell phones purchased by U.S. consumers.
The failure of Motorola’s claim, however, lay in another undisputed fact: Motorola itself did not purchase the price-fixed liquid crystal display panels. Instead, ten of its foreign subsidiaries (primarily in Asia) purchased the panels. The subsidiaries then incorporated the panels into cell phones, many of which were imported by Motorola into the U.S.
The Foreign Trade Antitrust Improvements Act of 1982 (“FTAIA”), 15 U.S.C. § 6a(1)(A), limits the reach of the Sherman Act to conduct that has a “direct, substantial, and reasonably foreseeable effect” on domestic trade and only when that direct domestic effect “gives rise to” the plaintiff’s claim.
The Seventh Circuit decision effectively held that the FTAIA meant what it said. The direct effect of the cartel was borne by Motorola’s foreign subsidiaries, which paid allegedly inflated prices for panels. The subsidiaries were thus the “immediate victims” of the conspiracy. Domestic commerce was only affected because Motorola’s subsidiaries increased the prices of phones that Motorola subsequently imported. But, that effect did not “give rise to” Motorola’s claim against the LCD cartel. Motorola was not suing its subsidiaries, and indeed, as the Court later points out, could not do so.
The Court’s opinion is thorough and its reasoning goes beyond the complex text of the FTAIA itself. The Court found additional support for its conclusion rooted in fundamental principles of logic. Motorola submitted to foreign laws in setting up its foreign subsidiaries (perhaps, the Court speculated, to take advantage of foreign tax laws or local markets). Having thus submitted to foreign laws, the subsidiaries must be governed by foreign laws in all respects, including foreign competition laws. “Distinct in uno, distinct in omnibus.”
Basic principles of corporate law further reinforced that logic, according to the Seventh Circuit, by generally treating parent and subsidiary as distinct and separate legal entities. Motorola’s argument hinged on the proposition that the Court of Appeals should disregard its own corporate structure and treat its subsidiaries as meaningless parts of Motorola itself. “In other words, Motorola is pretending that its foreign subsidiaries are divisions rather than subsidiaries.” The Court rejected Motorola’s novel argument. “Motorola’s foreign subsidiaries… are legally distinct foreign entities and Motorola cannot impute to itself the harm suffered by them.”
The Seventh Circuit also concluded that Motorola’s argument ran head-long into two established antitrust principles, each of which doomed its claim. First, Motorola was simply a shareholder (albeit, the only shareholder) of its subsidiaries. Shareholders of companies do not generally have standing to prosecute antitrust claims suffered by the companies they own. “Derivative injury rarely gives rise to a claim under antitrust law, for example by an owner or employee of, or an investor in, a company that was the target of, and was injured by, an antitrust violation.”
Second, Motorola’s argument collided with the indirect-purchaser doctrine of Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), which allows only direct purchasers from a cartel to sue for money damages under the Sherman Act and bars the direct purchasers’ customers and all other indirect purchasers from suing for money damages. Motorola’s argument did not survive the collision with Illinois Brick. “Motorola’s subsidiaries were the direct purchasers of the price-fixed LCD panels, Motorola and its customers were indirect purchasers of the panels.”
Finally, the Court found support in fundamental principles of international comity. Motorola’s foreign subsidiaries were injured in foreign countries as a result of their purchases from foreign companies. Those countries have different means of enforcing their competition laws than the Sherman Act; few have private causes of action, for example, and none allows the recovery of treble damages. To allow Motorola to sue in the United States would thus constitute an “unjustified interference with the right of foreign nations to regulate their own economies.” And, indeed, the Court noted that a number of those countries had filed amicus briefs urging the Court to reject Motorola’s claims.
The Seventh Circuit’s decision is not surprising, given the FTAIA’s statutory language and these other considerations. It now makes clear that U.S. companies cannot use their subsidiaries’ foreign incorporation as both a sword and a shield.
The full and original memorandum was published by Baker Botts LLP on December 1, 2014, and is available here.