Antitrust Law Daily Wrap Up, ANTITRUST—SDNY: Foreign Trade Antitrust Improvements Act Precludes Adjudication of Sherman Act Dispute Between Chinese Companies, (May 16, 2013)

By Jody Coultas, J.D.

The federal district court in New York City dismissed conspiracy and monopoly Sherman Act claims filed by electronic connector manufacturer Lotes Co., Ltd., against competitors Hon Hai Precision Industry, Foxconn Kunshan, and others for lack of subject matter jurisdiction (Lotes Co., Ltd. v. Hon Hai Precision Industry Co. Ltd., May 14, 2013, Scheindlin, S.). Lotes is a Chinese corporation, as are defendants Hon Hai and Foxconn Kunshan.

The Chinese companies compete directly in the Universal Serial Bus (USB) 3.0 connectors market. Because USB connectors are incorporated into other components and products, companies that manufacture them typically sell directly to notebook manufacturers and companies making motherboards for servers and desktops. No party is alleged to manufacture or directly sells any USB 3.0 connectors in the United States, the court noted.

Lotes alleged that Hon Hai’s willingness to bring patent enforcement proceedings and refusal to issue licenses was intended to foreclose Lotes from the USB markets and raise Lotes’ costs in those markets to the point that Lotes becomes uncompetitive was anticompetitive behavior that violated section 1 of the Sherman Act. The complaint also alleged that the defendants intended to, and had, become a monopoly.

The Foreign Trade Antitrust Improvements Act of 1982 (FTAIA) excludes from the Sherman Act’s reach much anticompetitive conduct that causes only foreign injury, and provides that the Sherman Act does not apply to conduct involving trade or commerce with foreign nations unless the foreign conduct significantly harms domestic commerce.

First, the court noted that the FTAIA is a jurisdiction-defining statute for the purposes of the decision. There is a split among the circuits as to whether the FTAIA is jurisdictional or whether it sets forth an additional element of an antitrust claim. The Second Circuit has held that the FTAIA forbids the exercise of jurisdiction over Sherman Act claims related to foreign trade or commerce, other than import trade or commerce, unless the conduct had a direct, substantial, and reasonably foreseeable effect on domestic or import commerce. Although recent cases may point against finding the FTAIA to be jurisdictional, the court was bound by Second Circuit precedent.

The issue was whether the offending conduct has a "direct, substantial, and reasonably foreseeable effect" on domestic commerce. An effect is "direct" if it follows as an immediate consequence of the offending activity. There was a disconnect between the relevant (foreign) market and the U.S. market supposedly affected by the attempted monopolization. Any effects on the U.S. market for finished computer goods were not effects linked to the relevant market of USB 3.0 connectors manufactured and sold in China. The allegations that the anticompetitive behavior resulted in higher computer prices and less competition in the U.S. were too attenuated to establish the proximate causation required by the FTAIA.

Because the lack of subject matter jurisdiction could not be cured by amendment, the court denied Lotes’ request for further leave to amend.

The case is No. 12 Civ. 7465 (SAS).

Attorneys: Nicolas S. Gikkas, Esq. (The Gikkas Law Firm) for Lotes Co., Ltd. Thomas J. Lang, Esq. (Morgan, Lewis & Bockius LLP) for Hon Hai Precision Industry Co. Ltd.

Companies: Lotes Co., Ltd.; Hon Hai Precision Industry Co. Ltd.; Foxconn International Holdings, Inc.; Foxconn International, Inc.; Foxconn Electronics, Inc.; Foxconn Kunshan Computer Connector Co., Ltd.

Cases: Antitrust NewYorkNews